Collective Investments - Life Assurance

Collective Investments - Life Assurance

• Life assurance is often seen as a way to provide a lump sum on death.
• It's a popular way to save and invest via endowments or investment bonds.
• Life assurance products are categorized as qualifying or non-qualifying.
• Qualifying policies mean proceeds on death or maturity are tax-free. Investment-based policies must meet rules for qualifying status.
• Premiums must be paid annually, with a term of at least ten years.
• The death benefit (sum assured) must be at least 75% of premiums.
• Whole-of-life policies have a term ending at age 75.
• Endowments have a reduced 75% requirement for each year the life assured exceeds age 55.
• Premiums in any year cannot exceed twice the previous year's premium.
• Premiums must not exceed 12.5% of total premiums payable.
• Qualifying status is lost if a policy is made paid up or surrendered, within 75% or less of its initial term.
• Qualifying status is lost if the sum assured or premiums are increased beyond limits after the plan starts. Extending the term by ten years can circumvent this.
• Taxation of qualifying policies changed in April 2013, limiting annual premiums to £3,600 per person.
• Policies issued after April 6, 2013 with premiums exceeding this limit are automatically non-qualifying.
• Policies issued between March 21, 2012, and April 6, 2013 with premiums exceeding £3,600 are categorized as RRQPs (Restricted Relief Qualifying Policies). Gains from excess premiums are treated as non-qualifying.

Endowments

• Endowments are regular-premium investment-orientated life assurance contracts.
• They pay a capital sum on maturity or earlier death.
• They're commonly used for target-savings like school fees or mortgage repayments.

With-Profits Funds

• With-profits funds are relatively conservative.
• Their goal is to provide guaranteed benefits while maintaining profit.
• They generally invest in government bonds (gilts) to reduce risk.
• The process of adjusting bonuses to smooth out peaks and troughs is referred to as 'smoothing.'
• Bonus payments are influenced by investment performance. Poor performance can led to reduced bonuses impacting maturity values.

Unitised With-Profits

• In a unitised policy, investors buy units in a with-profits fund.
• The value of these units cannot drop.
• Bonuses are added to the value of each unit or by increasing the number of units.
• Switching between unit-linked funds is often allowed.
• A market value adjuster (MVA/MVR) may reduce unit value during poor fund performance, especially when switching.

Unit-Linked Endowments

• These endowments' values are determined by the performance of the underlying fund.
• Investors can choose from various funds, including managed, equity, fixed-interest, property, and overseas equities.
• Initial charges are usually around 5%.
• These charges cover investment and advisory costs.
• Monthly or annual policy fees are common.
• There are numerous unit-linked charges, but they are typically detailed in the policy documents.

Traded Endowment Policies

• These are secondhand endowment plans, sold by policyholders.
• The buyer pays a premium.
• They are attractive because of the higher cash value compared to a direct surrender to the insurance company.

Investment Bonds

• Investment bonds are whole-of-life assurance policies, designed for investment.
• They operate on either a unit-linked basis or with profits.
• They are not necessarily tied to longevity or the life of the investor.
• Unit-linked bonds have a range of fund options.
• Regular withdrawals are possible.
• Onshore bonds and offshore bonds behave similarly, but have varying tax implications.

Taxation of Endowments /Investment Bonds

• Qualifying policies are often tax-free on encashment or death, but this depends on the rules and date of the policy.
• Non-qualifying policies have tax implications on encashment or death, dependent on individual tax status.
• Gain is calculated as the difference between the surrender value and the total premiums paid.
• Annual limits and conditions apply to both onshore and offshore bonds.
• The tax treatment is detailed in the policy document and is dependent on different types of bond.

Annuities

• Annuities are offered by life assurance companies.
• Payments are for an agreed term or for life. They are useful tools for retirement planning.
• A variety of types exist like life annuities, temporary annuities, immediate annuities, deferred annuities, and escalating annuities, capital-protected, and investment-linked annuities.
• Tax implications for annuities on both the receiver and payer are detailed in the policy document and rules.