Withdrawing funds from insurance bonds

News: February 2014

Withdrawing funds from insurance bonds

Single Premium Insurance Bonds can be a very tax efficient investment product as the tax rules allow up to 5% of the capital value to be withdrawn tax free each year. If no withdrawals are made that year the 5% tax free amounts accumulate so that after say 6 years 30% could be withdrawn from the Bond tax free.

Those seeking to make withdrawals should take professional advice before doing so. The tax consequences of exceeding this 5% limit are that the excess amount is taxable as income.

In a recent case before the Tax Tribunal a Mr Lobler failed to take proper advice and was faced with a massive income tax bill. He invested £1.1million in a series of life assurance bonds with Zurich Life. The insurance bonds fell in value and he decided to withdraw all of his money over a two year period. Rather than fully encashing the bonds he had made partial surrenders resulting in taxable income of approximately £1 million and a tax bill of £400,000!