Investment bonds – topping up verses new policy

With the increasing demand for investment bonds, we are also seeing an increase in enquiries about investing additional premiums to existing policies.  One question we encounter regularly is whether it is best to top up an existing bond or take out a whole new policy.

The complexity of the structure and tax rules for investment bonds means that there is no ‘one size fits all’ solution and the best answer to this question will depend on the client and policy specific factors. However, there are some general points that should be considered when assessing the position.

Establishing a new policy

Setting up a new bond will create more policies. Most bonds are segmented and, whilst each segment is identical, it can be regarded as a separate policy. By default, all new Transact investment bonds have 1,000 segments.  By creating additional segments there is increased flexibility when taking withdrawals, allowing more ‘fine-tuning’ of withdrawal amounts when opting for segment surrenders.  This fine-tuning also applies to situations where the policyholder wishes to pass the policy on via assignment to different individuals.

Investment bonds that are set up as life assurance policies (as is the case with the Transact onshore and offshore bonds) will have lives assured that cannot be altered once the policy has commenced.  Whilst being a life assured does not confer any ownership rights, the death of the last life assured is a termination event for the bond, triggering payout of the bond value (and any associated life cover) and creating a chargeable event for the taxation of any gains. Creating a new policy will provide an opportunity to assess whether to use the same lives assured or select different ones. It may be the case that the existing bond has just a single life assured, meaning the bond will terminate on their death. A new bond could allow for different or multiple lives assured giving greater possibilities to continue the investment and greater opportunities for the bond to be assigned following death of the original policyholder.

Of course, costs and charges might need to be considered particularly if a new bond will trigger additional establishment fees or wrapper changes.  For Transact bonds, there is no establishment fee, and we only charge the bond wrapper fee for the first bond that is established (the wrapper fee is £18 per quarter for the onshore bond, £60 per quarter for the offshore bond). Subsequent bonds are not subject to further wrapper fees.

From an administrative perspective, a new bond will require a new application, and the premium will need to meet the minimum requirements set out in the policy provisions or key features document.

Topping up an existing bond

With this approach, the new premium amount is allocated equally to each of the existing segments, increasing the premium per segment and the segment value. No new segments are created, and it is not possible to change or add lives assured. Also, whilst the premium per segment will increase, it should be noted that this approach does not offer any significant advantage in relation to the 5% tax deferred allowance, although for these purposes, the top-up is backdated to the start of the policy year from when it was paid, increasing the allowance for that year.

Whilst the flexibility that arises when creating a new bond is lost with this approach, a significant tax advantage can arise on termination of the policy. This is due to the method of calculating the number of years permitted for top-slicing purposes. Provided the policyholder has been UK resident throughout the term of the bond, and the bond commenced after 5 April 2013, the term for top slicing relief will date back to the commencement date of the original bond for whole segment surrenders, and back to the later of the date of the previous excess event, or the commencement date of the original bond, for partial withdrawals from all segments. This could have a significant impact on the tax due on any chargeable gain.

The process for topping up a Transact bond is quite straightforward, requiring just the completion of the additional premium notification form, although additional source of wealth information may be required, depending on the initial information and the amount of the additional premium.

With the increases expected in lifetime gifting, given the future inclusion of unused pensions in IHT calculations, this question is likely to arise more often, particularly if gifts are being made regularly, perhaps from surplus income. Understanding the consequences of different approaches can help optimise the withdrawal strategies and tax mitigation that can be achieved using investment bonds.

If you have any questions, please feel free to contact the Technical Services team.

All information is based on our understanding and interpretation of applicable law and regulation.

 

 

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