| Background | | | | allowance trap' area. |
| A Life Insurance Investment Bond is widely | | | | If you are aged 65 or over you have a higher |
| available for you to invest in. As with many | | | | personal allowance, however, this is reduced |
| investments, there are advantages and | | | | where taxable income exceeds a certain limit. The |
| disadvantages to using this form of tax wrapper. | | | | limit for 2010/11 is £22,900 and for each £2 of |
| One of the main points to bear in mind is that the | | | | income above this limit the personal allowance will |
| tax wrapper status of any financial product | | | | reduce by £1 until it falls to the standard levels. |
| dictates how much tax you will/won't pay on the | | | | The withdrawals from a bond do not count |
| investment at outset, during and at the end of | | | | towards income for these purposes and so can |
| the term. | | | | be useful for providing additional 'income' whilst |
| It is the actual funds where the money is | | | | maintaining the higher allowances. This is in |
| invested that determines how much you will get | | | | contrast with other investments, ie deposits, |
| back when the plan matures or you cash it in. | | | | shares, unit trusts and OEICs where the interest |
| One of the main advantages of the Life Insurance | | | | or dividends will be added to your income and |
| Investment Bond, either onshore or offshore, is | | | | taxed accordingly. |
| that you are able to withdraw up to 5% of the | | | | Looking at an example, John is 67 and has pension |
| amount invested each policy year without | | | | income of £22,000 in the tax year 2010/11. He |
| triggering what is known as a 'chargeable event | | | | also has £200,000 on deposit which pays him |
| gain'. | | | | 3% gross interest, ie £6,000 in the tax year. |
| Whilst this defers any tax liability to the future (it | | | | This means his total income of £28,000 takes |
| may not avoid any further tax due), the good | | | | him over the age related allowance of £22,900 |
| news is that each 5% allowance is cumulative | | | | by £5,100. His age related allowance will |
| therefore and can be carried forward each policy | | | | therefore be reduced by one half of this amount, |
| year. For example, if no withdrawals are made in | | | | £2,550, bringing it down from £9,490 to |
| years one to four 25% can be drawn in year five. | | | | £6,940. |
| You are not able to take more than the amount | | | | If he had invested the £200,000 in an Offshore |
| invested over the lifetime of the bond, therefore | | | | Investment Bond he can take withdrawals of |
| if you withdraw 5% per annum the maximum | | | | 2.4% giving him annual 'income' equivalent to the |
| time period for these withdrawals is 20 years. | | | | net interest from his deposits. |
| HMRC treat withdrawals as a withdrawal of capital | | | | He would have saved £1,710 in tax in the |
| and if the amounts are kept within the tax | | | | current tax year by maintaining his entire age |
| deferred allowance there is no need for you to | | | | related allowance (£2,550 x 20%) and deferring |
| declare them on their tax returns. | | | | the 20% tax on the interest (£6,000 x 20%). |
| As tax on the withdrawals are deferred until the | | | | He would also have the flexibility to increase these |
| bond or policy segments are surrendered you can | | | | withdrawals in future years and have potential for |
| defer tax until the most suitable time for your | | | | some capital growth. |
| circumstances. | | | | Of course, tax will be payable when a chargeable |
| 5% Withdrawals | | | | event is triggered, however, if a lower withdrawal |
| The 5% tax deferred allowance provides a gross | | | | rate is used this can be delayed for some time. |
| equivalent income of 6.25% for a basic rate tax | | | | Summary |
| payer, 8.33% for a higher rate tax payer and | | | | It is important to bear in mind that we have only |
| 10% for a 50% tax payer. | | | | looked at one or two factors of Investment |
| To reiterate though, (and before you get carried | | | | Bonds in this article and you should take |
| away) remember that withdrawals from the bond | | | | professional advice before you make any |
| are tax deferred and not tax free! | | | | important financial decisions. |
| It is possible to extend the number of years that | | | | Our view is that you should always weigh up the |
| you can take tax deferred withdrawals by taking | | | | pros and cons of any investment in line with your |
| less than the 5%. | | | | individual circumstances before you proceed. |
| For example, if you take 4% per annum then this | | | | The Financial Tips Bottom Line |
| can be continued for 25 years without any | | | | Investment Bonds, whether onshore or offshore, |
| immediate tax charge. | | | | can offer valuable benefits to investors as part of |
| Reducing Taxable Income | | | | an overall investment programme. |
| As the withdrawals are treated as a withdrawal | | | | Alongside these products, you should also consider |
| of capital they can be helpful when trying to keep | | | | other mainstream offerings such as personal |
| your income below certain levels. | | | | pensions, ISAs, unit trusts, deposit savings and |
| Some clients, or their spouse / partner, may | | | | investment trusts. |
| have income that hovers around the 'age | | | | |