Time for the fund to stop?

By THIS IS MONEY
Updated:

 

I INVESTED £20,000 in a Sun Life Deferred Distribution Bond and £15,000 in Scottish Provident Managed Distribution fund in 1995. I've not taken any income yet and the funds are valued at £31,000 and £21,000. I can take 5% of my initial investment each year, tax-free, plus distributions. My current IFA advocates closing these accounts and investing the money in Scottish Widows Flexible Investment Bond because I can take 5% of £52,000 each year. Is this good advice or a ploy to gain commission? RT, Aylesbury.

Anna Bowes, independent financial advisor at Chase de Vere, says: This advice is not necessarily wrong. I'll explain the pros and cons. Firstly, the 5% you mention includes any distributions (you don't get them on top of this) and it is not tax-free because basic rate tax is deducted at source.

So if you are a basic rate taxpayer there is no tax saving to be had, though if you are a higher rate taxpayer, you can in effect defer the higher rate tax on your drawings for 20 years or until the bond is encashed. If you are a basic rate taxpayer, closing these two investments and buying another will make no difference in terms of tax.

But if you are close to being a higher rate taxpayer, there is a danger that by encashing the 5% the resulting gains will push you into the higher rate tax bracket.

If you are a higher rate taxpayer you will eventually have to pay the higher rate tax on the gains anyway, and it is questionable whether the benefit of being able to withdraw 5%, tax deferred, will outweigh the tax you will have to pay on encashment now.

I'd say if you are a higher rate taxpayer you need more justification for this move than simply deferring higher rate tax - for instance, if you want to reduce risk. Moving from a distribution bond, which is stock market-linked, to a with-profits bond, which isn't, could do this. If you are a basic rate taxpayer it might also be worth cashing in and reinvesting elsewhere if your current providers restrict the amount of your original capital you can take out annually - some do.

I think you should ask your IFA for more details of why he is suggesting this. If necessary get another opinion before you decide.

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