THE MONEY DOCTOR
Financial worries or just looking for better value for money? Consumer champion Fergus Muirhead answers your questions
per cent a year from the bond without incurring any immediate liability to tax.
This five per cent is treated as a return of the original capital that you invested and bears no relation to the investment returns being generated by your bond.
So if you invested £100,000 in your bond, you could take up to £5000 a year without paying any tax at the point you withdraw the cash. If you don’t take £5000 out this year, you can withdraw £10,000 next year, so the withdrawals are cumulative.
If you withdraw £5000 and the bond falls in value by £5000 because of poor investment returns then you will be left with £90,000 at the end of the year.
If the bond rises in value by five per cent and you withdraw five per cent, then you will still have £100,000 in the bond at the end of the year.
You still have to account for the gains you make at some point, and this will usually be at the time you decide to cash in the bond completely.
At that stage, a calculation will be done to work out how much the bond has grown in value since you took it out and you could then have a tax liability.
It will be income tax you are due to pay on any gains that you have made.
You could also have a tax liability if you withdraw more than five per cent of your initial investment. At that stage, you should speak to the adviser who sold you the bond in the first place.
There are different ways to take money out of a bond depending on how it was set up in the first place. Each of these options could generate a different tax liability.
In some cases the difference could be significant and you could end up with a large tax bill if you are not careful.
These investment bonds are a great way of generating a tax efficient income in retirement, especially if you have money in pensions and in ISAs as well as a bit of pension income and you are trying to figure out the most efficient way to access the income you need.
It is also possible to add your children to your bond and, in that way, your investment can be passed to them in the event of your death without the underlying assts having to be sold.
Email your problems to Or post them to The Money Doctor, Daily Record, One Central Quay, Glasgow, G3 8DA Unfortunately Fergus can’t reply to every question in person.