Many investors may decide to hold their chosen funds in an onshore or offshore investment bond “wrapper”. It has some unique options that make investment withdrawal particularly attractive to certain investors, especially higher rate tax payers who may at some point may want to withdraw up to 5% of their original investment each year, without any immediate income tax liability.
Withdrawing more than your 5%
But what happens if you need to withdraw a larger sum than 5%? The dangers of DIY investment withdrawals are real and can often be costly. All your hard work with fund selection can get seriously eroded if unnecessary tax charges arise from taking withdrawals in the wrong way.
Investment Bonds are often structured as a series of identical policies, or ‘segments’ and there are two options when withdrawing money with hugely different tax results. It’s important to understand these differences and to give clear instructions when requesting withdrawals to avoid “artificial” gains that bear no relation to the actual investment performance achieved.
If withdrawals in the early years are taken as a full surrender of individual segments the tax due is often a fraction of what would be due if the withdrawal was done by partial surrender across the whole policy. That doesn’t mean it will always be the right choice for everyone as it could restrict future income, so it is vital to understand the implications of both.