When clients have an additional sum of money to invest, and the advice is to use an investment bond, we’re often asked if it’s better to top up an existing investment bond or buy a new one.
The answer, as with all financial decisions, is… it depends! There are several factors to consider.
The first one being ‘does the investment bond product allow top ups?’.
If the policy terms & conditions don’t allow additional investments to be made, then this is a non-starter, and a new investment bond is the route to go. If the bond is subject to a trust, then that’s a discussion for another day.
Next, think about how the existing bond is set up:
1. Who are the lives invested?
Is the investor the only life assured, or has the bond been set up with multiple or younger lives? Is it a capital redemption bond with no lives assured?
Death of the sole, or last, life assured brings the investment bond to an end. This is a chargeable event which could cause an income tax liability on the owner at the time of the event. Adding or removing a life assured is also a chargeable event, so this is not normally recommended, even if the provider allows it.
The investor might be a higher or additional rate taxpayer. If they’re the sole life assured, they may not want to add more money to an investment that causes an income tax charge on their death. Setting a new bond up with younger lives or on capital redemption basis would allow it to continue after the death of the investor and give more control over who is ultimately taxed.
2. Is the underlying fund/investment choice restricted?
Some older investment bonds, particularly UK (onshore) bonds, have a restricted fund choice. Topping up this type of bond means that the new investment amount will also be restricted to this fund choice unless the policy can be endorsed. If the investor wants more flexibility, or open architecture, then they should consider investing in a new bond instead.
3. How many segments (or individual policies) are there?
With great segmentation comes great flexibility, I’m paraphrasing from a superhero film here, but a top up is generally distributed equally across the existing number of segments, increasing the investment amount. It’s unusual for a provider to create new segments with a top up. So, if the existing investment bond doesn’t have many segments, then the flexibility in gifting and tax planning will be restricted. The investor might want the flexibility of using a new investment bond with greater segmentation.
Finally, think about the taxation implications. We’ll discuss these points in a future blog. In the meantime, our Additional Investments Briefing Note explores them in detail.
- Can a top up reduce the overall chargeable gain amount?
- How will the top up impact the 5% tax deferred allowance?
- Does the top up affect the number of years for top slicing relief?
If you would like to learn more about investment bonds and how they could work for your clients, get in touch with our team by emailing wealth.sales@canadalife.co.uk
Additional Resources
The impact of additional investments
Learn more about how additional investments could affect your client’s investment strategy, including chargeable event gain calculations.
Our most flexible investment bond
Discover how our international wealth solutions could help your clients.
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