TAKING A LUMP SUM FROM YOUR BOND. More choice and flexibility

Transcription

1 INVESTMENT BOND TAKING A LUMP SUM FROM YOUR BOND More choice and flexibility This leaflet will help you and your adviser to understand: The different ways you can take a lump sum from your bond The way your bond is set up The potential tax implications.

2 TAKING A LUMP SUM FROM YOUR BOND THERE ARE THREE WAYS TO TAKE A LUMP SUM FROM YOUR BOND: a partial encashment across all policies encashing whole policies a combination of the above. You can ask to take a lump sum, one-off withdrawal from your bond, at any time. Any amount up to a maximum of 7.5% per year (including any regular withdrawals already taken) of the investment amount of each individual policy can be taken. We no longer apply early withdrawal charges. You need to consider the following if you want to make a one-off withdrawal: if you re taking regular withdrawals from your bond, this will count towards the limit set for the amount you can take out each policy year it counts towards the 5% allowance you can take without an immediate liability to tax taking withdrawals will reduce the value of your bond any withdrawals you take could be greater than any growth achieved which could reduce the value of your bond to below the amount originally invested the value of your bond will be reduced if the charges exceed the amount of growth in the investment funds in which your bond is invested. Please note: The examples in this booklet don t take into account any charges that are made at the start of the policy or at any subsequent investment. Before taking a lump sum from your bond we strongly recommend that you consult a financial adviser. The taxation of your bond is complex and governed by specific legislation and regulations. In particular, you will need to consider the immediate and potential effects of taxation and the amount you may need to pay to HM Revenue & Customs. 1

3 HOW IS MY BOND SET UP? THE FOLLOWING DIAGRAM SHOWS HOW AN INITIAL INVESTMENT COULD BE SPLIT ACROSS POLICIES AND HOW YOUR OPTIONS COULD WORK. PLEASE NOTE THAT THIS IS PURELY HYPOTHETICAL. INITIAL INVESTMENT Your bond is issued as separate policies for tax planning purposes. When you make an investment into your bond, your payments are applied equally across each policy: 100,000 initial investment and so on 100 If you have invested in more than one fund, the funds will be split evenly across each policy: and so on 20% UK Growth Fund 80% Balanced Fund 2

4 TAXATION THE AMOUNT OF POTENTIAL TAXATION CAN BE AFFECTED BY THE WAY YOU CHOSE TO TAKE YOUR ONE-OFF WITHDRAWAL. Please note: We will use this method if you want to take a lump sum but don t specify which method you would like to use. Method 1 A partial encashment across all policies An equal amount is taken from each policy within the bond. For example, if a 10,000 lump sum is taken from the bond, 100 would be taken from each policy. This example assumes that there has been no growth on the initial investment earlier. It also assumes there has been no subsequent investment into the bond and no previous regular withdrawals or partial encashments. We are no longer applying early withdrawal charges. 100,000 initial investment Initial 100 partial encashment from each policy and so on left in each policy % UK Growth Fund 80% Balanced Fund You can take up to 5% of the amount you invested in each individual policy per policy year without incurring an immediate tax charge. This is known as a tax deferred allowance it is not tax free. Example: If your initial investment was in a bond of 100 policies of 1,000 each, you could partially encash 50 from each policy each year, i.e. 5,000 across the whole bond. This tax-deferred allowance accumulates, so if you don t use it fully one policy year, you can carry it forward to the next and subsequent years. Example: With an initial investment of 100,000, if nothing is taken from the policy in the first policy year you could withdraw up to 10,000 in the second policy year. 3

5 Please note: The maximum amount that you can take over the lifetime of your bond using the tax-deferred allowance must not exceed the total amount you have paid into your bond. Example: With an initial 100,000 investment in a bond with 100 policies, you could take 5,000 per policy year over 20 years or 4,000 over 25 years and so on. The value of any partial encashments that you make over the lifetime of each policy will be added to the final encashment value when calculating any chargeable event gain arising on that policy s termination. If you partially encash more than the 5% tax-deferred allowance (allowing for any allowances you have carried forward) then the excess may be liable to income tax. Basic rate tax is deemed to have been paid on this excess, so if you are a higher rate or additional rate taxpayer (or will become one once you have taken money from your bond, after allowing for any top-slicing relief) you will have to pay extra tax at the difference between the basic rate and the higher rate(s) of income tax on the amount of the excess that falls into the higher-rate band. Non-taxpayers cannot reclaim the tax treated as paid. Tax treatment depends on your individual circumstances and may be subject to change in the future. Tax rules may also change. If you are taking less than the accumulated 5% tax-deferred allowance there will be no immediate tax liability. However, your future tax liability may be higher. Top-slicing relief Bond gains are charged to income tax in the year in which the encashment takes place, or in which the policy year ends for a partial encashment. However, the gains may have grown gradually over the life of the policy. Top-slicing relief tries to rectify the situation where the gain will take an individual s income above the basic-rate band, and into higher-rate tax, by dividing the profit or excess over a number of years of the policy s life. Top-slicing relief may also be of use if you re normally a higher rate taxpayer but become an additional rate taxpayer because of a gain. Please see your financial adviser for further details. 4

6 Method 2: Encashing whole policies Instead of partially encashing across all policies within your bond you can encash whole policies. This will reduce the number of policies remaining in your bond. 100,000 initial investment 1 and so on 100 ENCASH 6 POLICIES 94 policies remain 6,000 94,000 20% UK Growth Fund 80% Balanced Fund If you encash individual policies and there has been an overall profit on those policies (taking into account previous amounts taken from the bond and chargeable event gains), then you may have to pay income tax on that profit. Any profit you make on encashing policies will be treated for tax purposes as though you have already paid tax at the basic rate. If you are a higher rate or additional rate taxpayer (or will become one once you have taken money from your bond, after allowing for any top-slicing relief see previous section), you will have to pay an extra amount of tax at the difference between the basic rate and the higher rate(s) of income tax on the proportion of the profit that falls into the higher rate category. Non-taxpayers cannot reclaim the tax treated as paid. Once a policy has been encashed the amount that may be taken across the bond using the 5% tax-deferred allowance will be reduced accordingly for subsequent policy years. Encashing complete policies may mean a lower tax liability than partial encashments. Tax treatment depends on your individual circumstances and may be subject to change in the future. Tax rules may also change. 5

7 WHAT SHOULD I DO NOW? As there are different options for you to consider, it is important that you seek advice from a financial adviser before taking any action. Because the taxation of your bond is complex, and ultimately depends on your personal tax circumstances, we cannot advise you of the precise method that you should choose. However, we do offer specialised services to financial advisers in respect of bond taxation which they can use to help you make your decision. Regardless of which method you use to make a regular withdrawal or partial encashment from your bond, we will notify you and HM Revenue & Customs of any excess or profit that may be liable to income tax, and the tax year in which it will be assessed. These guidelines have been prepared on our understanding of the law in the United Kingdom of Great Britain and Northern Ireland, and current HM Revenue & Customs practice. We are not able to comment on the taxation of bonds in other tax jurisdictions. The law and HM Revenue & Customs practice are subject to change. We cannot undertake the role of tax adviser and this guide should not be seen as a substitute to seeking professional advice. Before making any withdrawals from your bond we strongly recommend that you seek further information and clarification from your financial adviser. We are not liable for any loss incurred as a consequence of relying on the information contained within this guide. Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number /17