How can a lump sum or withdrawal be made (from an onshore/offshore bond)?
There are three ways to take a withdrawal from a bond:
- A partial surrender across all segments
- The liquidation of whole segments
- A combination of the above
Voyant gives you the ability to choose from one of these three options, for plans where onshore or offshore bonds form part of a client’s assets. This constitutes a one-time choice only for each onshore or offshore bond.
These encashment options can be found for bonds/life funds on the Investments screen, under Advanced Settings, on the Liquidation Limits & Planned Withdrawals panel.
The Life Fund Withdrawal Strategy setting determines how segments will be liquidated, whether you use this panel to schedule planned withdrawals from the bond or when the software takes funds from a bond automatically, to fulfill expenses, which can be controlled on this panel using liquidation limits.
Read more>> about liquidation limits and planned withdrawals.
Always Incur Excess Withdrawal
Withdrawals can be taken by partial surrender. An equal amount is withdrawn from each segment, and up to 5% of the total amount paid into each segment can be withdrawn, each policy year, without incurring an immediate charge to income tax. Where a partial surrender exceeds the (cumulative) tax-deferred allowance, this creates a chargeable event gain, which may be liable to income tax.
Although a tax liability may be mitigated, or avoided altogether by the use of top-slicing relief, where a chargeable event is a second or subsequent part surrender, the gain is top-sliced by dividing it only by the number of years since the previous chargeable event. For offshore bonds, however, one always divides by the full number of years that the bond has been in force.
For onshore bonds, of course, the excess is treated as carrying a 20% un-reclaimable tax credit. For offshore bonds, on the other hand, the entirety of any excess will be subject to income tax, at the individual’s marginal rate(s).
There is a further tax implication inasmuch as the value of any partial withdrawals within the 5% per annum allowance will be added to the final encashment value of each segment, for the purpose of determining the overall gain.
Always Encash Segments
Withdrawals can be taken by cashing-in whole segments. If whole segments are liquidated, and there has been an overall gain on those segments (taking account of previous withdrawals and chargeable event gains), then any gain on those segments may be subject to income tax.
Again, for onshore bonds, any gain is treated as carrying a 20% un-reclaimable tax credit. For offshore bonds, on the other hand, the entirety of any excess will be subject to income tax, at the individual’s marginal rate(s).
Where entire segments have been liquidated, this will reduce the value of the available tax-deferred allowance. The 5% allowance reduces proportionately, depending upon the number of segments cashed-in.
Attempt to Optimize
Withdrawals can be taken by combining the two methods. When the "Attempt to Optimize" option is selected, the software will attempt to use a combination of the above methods, in order to generate the lowest immediate income tax charge. Please note that we can’t guarantee the software’s ability to generate an optimal strategy, in every instance – tax-planning is not its purpose, after all – we would suggest, however, that the software’s ability to arrive at the best outcome is maximized when withdrawals have been scheduled, in the form of planned withdrawals, as opposed to withdrawals that are made on an ad hoc basis, by the software.
Where to set the segmentation of bonds
Bonds must generally be segmented for these encashment options to have effect. For example, if the option to "Always Encash Segments" is selected, any planned or ad hoc withdrawals from the bond would result in the liquidation of the entire bond since there is effectively only one segment.
Segmentation is set for bonds under Advanced Settings, on the Life Fund Segments panel.
First Published 02 September 2015, Release 4.0.19