I am unable to provide you with specific advice but hope that the following information will allow you to consider your options. Investment bonds can be an effective investment for certain people but it is important to remember that, in the early years, there are likely to be exit penalities that would be applied if you encashed all or part of the bond (to allow the insurance company to recoup charges and commissions).
Investment bond returns are taxed as income rather than capital gains and a UK-based investment bond effectively suffers income tax at the basic rate regardless of whether or not you are a tax payer. The rules allow you to take up to 5% of the original capital you invested each year (for up to 20 years) as a regular withdrawal. This is effectively tax deferred.
If you are thinking of encashing you not only need to consider the surrender penalties, as mentioned above, but also the potential tax charge. To calculate the tax charge you need to perform a "top slicing calculation" as follows:
current value of your investment + total withdrawals to date = Total value on which tax charge will be based.
Taking the total value you have calculated, deduct the original investment and divide the result by the number of whole tax years you have held the investment.
The resulting 'slice' should be added to your gross total income for the tax year. If you remain within the basic rate tax band there is no additional tax to pay. However, if the slice pushes you into higher rate tax the whole amount of the gain, not just the slice will be charged at the relevant higher rate of income tax.
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