Life Assurance -Is there any point ?

[jaizan]

My mother has an investment policy with the Prudential. My initial advice was to close it and move the money to an ISA.

Upon further examination, it appears this is a "Life Assurance Policy". Assurance, not Insurance.

1 Google is not very helpful on the subject. It asks "do you want to search for Life Insurance instead?", without giving me the option to say NO. So I have to scroll through irrelevant results.

2 It's not at all clear if there is any tax break for this. According to some sites, to be a "Qualifying Life Assurance Policy", payments have to be made for 10 years or 75% of the term.
That's an immediate fail, as they just paid a lump sum in. So I can assume it's a non-qualifying Life Assurance policy.
Perhaps that's one reason why most of the correspondence doesn't mention the words "Life Assurance".

Does any one know of a good resource to explain Life Assurance Policies ?
Any reasons to keep it open ?

If anyone suggests going to a Financial Advisor, well, when taking this out, they paid a 4 figure sum for financial advice from a major global bank.
I think that advice was unsatisfactory, as it doesn't even seem to compare this with alternatives (such as an ISA) or clearly explain the tax position of the policy. So I don't see the point of that advice.

Obviously I am going to go away and do further work on this myself. However, on a forum like this, someone might point out something I hadn't even thought of.

If she is closing it, ideally that would be done by April 5th, which may also be a challenge.

[Alaric]

Obviously I am going to go away and do further work on this myself. However, on a forum like this, someone might point out something I hadn't even thought of.

The very first question is whether it's a regulat premium or single premium policy. In other words are regular monthly or anuial amounts being paid in?

Assuming it's the latter it's in essence much the same as a holding in an Investment Trust, OEIC or Unit Trust with taxation differences both at the level of the institution which offered it (the Prudential) and in the hands of the holder. Mostly it will be regarded as taxed in the Pru, so there isn't additional tax to be paid for basic rate taxpayers when you take out the accumulated value.

It might well be structured as having a number of units and a unit price, If so, the value will usually be the number of units multiplied by the price. It's probably got some fancy name. If so Google that for more information.

For example
https://www.mandg.com/pru/customer/en-g ... dence-bond

[tjh290633]

Since the removal of LAPR (Life Assurance Premium Relief) there has been no case for using life assurance linked investments. If you wanted life cover, it was better to buy it separately.

How long ago was the policy bought?

TJH

[jaizan]

The very first question is whether it's a regular premium or single premium policy. In other words are regular monthly or annual amounts being paid in?

How long ago was the policy bought? TJH

Thank you for the comments so far.

This is a single premium policy, bought around the end of January 2020. With financial "advice" from the HSBC.

[tjh290633]

The very first question is whether it's a regular premium or single premium policy. In other words are regular monthly or annual amounts being paid in?

How long ago was the policy bought? TJH

Thank you for the comments so far.

This is a single premium policy, bought around the end of January 2020. With financial "advice" from the HSBC.

Presumably HSBC were advising about their own products? Or they were acting as IFAs?

I have a feeling that this could be actionable.

TJH

[jaizan]

Presumably HSBC were advising about their own products? Or they were acting as IFAs?
I have a feeling that this could be actionable.
TJH

HSBC were advising on an investment product with the Prudential, so I presume that's an IFA.
They were paid a four figure sum for this advice.

At the moment, I cannot fathom why they advised on this policy, which is apparently taxed, whilst failing to advise that my parents use their ISA allowances. What's the point of financial advice if they have output like this ?

Also, it appears any gains would be taxed as income ?
Normally that's a bad thing as well, although at least it means I don't need to try to get it closed by Friday to use her CGT allowance.

[SalvorHardin]

I'm somewhat rusty as I haven't worked as a fee-paying IFA for 27 years. I reckon that the life assurance policy discussed here is probably a single premium investment bond.

When I was an IFA I regularly encountered clients who had been advised by banks and insurance companies to put lump sums into single premium investment bonds which in turn invested in the insurers' managed funds. These bonds paid 5% commission as opposed to 3% on unit trusts or 0% on investment trusts.

There was usually a small life assurance element, an extra 1% of the value of the bond's funds was paid on death. The tax advantage was that you could withdraw 5% tax free every year for ISTR 20 years (it's essentially a return of capital). I haven't a clue if these rules apply nowadays.

When we had a client who was very reluctant to invest in the stockmarket, we would often recommended these bonds as an alternative to holding lots of cash on deposit for many years, but only into an insurance company's with-profits fund and only using lump sums. With-profits funds' performance over the long term was much better than cash but worse than the stockmarket, whilst their values were much more stable (lots of people clung to deposit accounts primarily because they could not cope with stockmarket volatility). We also used to rebate the commission to the client (or their accountant to pay their fees)

[Alaric]

There was usually a small life assurance element, an extra 1% of the value of the bond's funds was paid on death. The tax advantage was that you could withdraw 5% tax free every year for ISTR 20 years (it's essentially a return of capital). I haven't a clue if these rules apply nowadays.

I don't think the rules have changed. I would imagine these bonds are now something of a niche product as they should only be applicable when there's no ISA headroom. Also there has to be a case for preferring these to straight investment into OEICs.

Here's what St James Place think
https://www.sjpmarketingstore.co.uk/sjp ... JP3243.pdf

[Howard]

My mother has an investment policy with the Prudential. My initial advice was to close it and move the money to an ISA.

Mrs H invested in this type of bond just over 20 years ago. We saw this as a fairly stable investment which would pay out 5% tax free. Mrs H was fully investing in ISAs and intended to continue. This was an investment of surplus cash.

The bonds delivered income with modest capital gains so are worth substantially more now. Overall they have given around 7 - 8% return pa over the 20 years. Most of the initial commission was returned to us but I can’t remember exactly how. We didn’t pay for advice but I was aware of modest ongoing charges.

I agree with your idea of selling because this doesn’t seem to me to be a suitable investment for older people.

We are now, coincidentally, in the process of selling the bonds in chunks. The reason is to simplify her portfolio and fund bare trusts for grandchildren. If your Mother’s bond is similar, you are correct in that any gain in excess of 5% pa attracts income tax. Mrs H’s taxable income is lower now and so the tax won’t be onerous.

We asked the insurance company to give us a guide as to how the bond sales would be treated for tax and, whilst this wasn’t advice, it was very helpful. I’d suggest asking for this before you sell. In our case, the taxable event is not when the money is paid out but on an anniversary date. So well into next tax year.

Hope this is helpful.

regards

Howard

[GrahamPlatt]

Might be useful to hold on to it if handled right (and depending on circumstances)

https://www.moneysupermarket.com/life-insurance/tax/

PS https://www.aviva.co.uk/insurance/life- ... assurance/

[Howard]

The link in Graham's helpful post above does provide one interesting suggestion which my post omitted.

If you believe you will have to pay significant IHT on your Mother's estate you could ask her to put the Policy into trust so that it could be used to pay all/some of the IHT as it will be outside the estate for tax purposes. This assumes legislation doesn't change and your Mother lives for some more years - needs further checking.

Relevant extract from the link is:

"To place a life insurance policy into trust, you'll need to appoint trustees to manage the policy for the benefit of your chosen heirs. This can be done at any point and often with the assistance of your policy provider, often free of charge. This step ensures that the policy payout is not considered part of your estate for IHT purposes and that your beneficiaries receive the money promptly."

regards

Howard

[jaizan]

Thank you for the advice everyone.

Incidentally, this is a Life Assurance policy, not a Life Insurance policy.

I also note, that even if there were benefits for be had from putting this policy into trust, that's another thing the HSBC financial advice failed to mention. I suspect all they were thinking of would be the commission.