Collective Investments - Life Assurance
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Questions and Answers

What is the corporation tax rate on gains made by the fund in onshore bonds?

  • 25 per cent
  • 15 per cent
  • 30 per cent
  • 20 per cent (correct)

    • What happens if a non-taxpayer is invested in an onshore bond?

  • They receive a tax refund on the corporation tax paid.
  • They benefit from a higher tax allowance.
  • They are liable for basic-rate income tax.
  • They cannot reclaim the tax deducted by the manager. (correct)

    • How much of the original capital can be withdrawn tax-free each policy year?

  • 20 per cent
  • 2 per cent
  • 5 per cent (correct)
  • 10 per cent

    • What is the implication of not withdrawing the full 5 per cent in a year?

    <p>It can be carried forward for future withdrawals. (B)</p> Signup and view all the answers

    What type of policies are investment bonds classified as?

    <p>Non-qualifying policies (A)</p> Signup and view all the answers

    What occurs when the equivalent of 20 times the 5 per cent withdrawal has been taken?

    <p>Further withdrawals become chargeable gains. (B)</p> Signup and view all the answers

    Which event is considered a chargeable event for onshore bonds?

    <p>Death of the life insured (A)</p> Signup and view all the answers

    What advantage do bonds offer to higher-rate taxpayers?

    <p>An income stream without immediate tax implications. (D)</p> Signup and view all the answers

    What is the calculated amount of top-slicing relief after considering tax on the bond slice?

    <p>£1,270 (A)</p> Signup and view all the answers

    What change occurred in annuity rates due to the European Court of Justice ruling on gender equality?

    <p>Elimination of gender discrimination in pricing (D)</p> Signup and view all the answers

    What is the primary purpose of top-slicing relief?

    <p>To calculate overall tax liability on a gain (D)</p> Signup and view all the answers

    How does the guaranteed income from an annuity relate to the investor's life expectancy?

    <p>It directly impacts the annuity rate (C)</p> Signup and view all the answers

    Which of the following best describes a characteristic of annuities?

    <p>They provide income for life or a fixed term (C)</p> Signup and view all the answers

    What happens to annuity rates when interest rates decrease for a sustained period?

    <p>They may reduce (C)</p> Signup and view all the answers

    What is the total tax liability before considering top-slicing relief based on the provided figures?

    <p>£18,946 (C)</p> Signup and view all the answers

    What does the term 'PSA' stand for in the context of bond slices?

    <p>Personal Savings Allowance (B)</p> Signup and view all the answers

    What is the primary benefit of segmenting an investment bond?

    <p>It treats withdrawals on a per-bond basis to mitigate tax obligations. (C)</p> Signup and view all the answers

    How did Mr Lobler's failure to seek advice impact his investment?

    <p>It created a situation where he was taxed on excess withdrawals. (B)</p> Signup and view all the answers

    What is the '5 per cent' rule in relation to withdrawals from an investment bond?

    <p>Withdrawals exceeding 5 percent are considered excess withdrawals for taxation. (B)</p> Signup and view all the answers

    What would be a consequence of completely encashing a mini-bond that has decreased in value?

    <p>The loss on encashment may be deducted from taxable gains. (B)</p> Signup and view all the answers

    What was the key mistake made by Mr Lobler in his bond withdrawal process?

    <p>He incorrectly completed the withdrawal form. (D)</p> Signup and view all the answers

    In the case of Lobler v HMRC, what was the effective tax rate Mr Lobler faced as a result of his actions?

    <p>779 percent (C)</p> Signup and view all the answers

    How can clustering of bonds help mitigate tax implications?

    <p>By allowing each bond to be treated separately for tax purposes. (A)</p> Signup and view all the answers

    What can be inferred about the fairness of the existing withdrawal rules following the Lobler case?

    <p>There is a concern that the rules impose unfair tax burdens. (B)</p> Signup and view all the answers

    Which factor can influence annuity rates according to location?

    <p>Mortality rates (B)</p> Signup and view all the answers

    What happens to the premiums if the policyholder dies before the income from the annuity starts?

    <p>They are returned without interest. (A), They are returned with interest. (B)</p> Signup and view all the answers

    How do escalating annuities compensate for inflation?

    <p>By guaranteeing payments that increase each year. (C)</p> Signup and view all the answers

    What is a key characteristic of a life annuity?

    <p>Payments are made for the individual's life and cease upon death (C)</p> Signup and view all the answers

    Which type of annuity guarantees payment even if the individual dies during the term?

    <p>Annuity certain (D)</p> Signup and view all the answers

    In the context of annuities, what does 'without proportion' refer to?

    <p>No final payment made if the annuitant dies. (B)</p> Signup and view all the answers

    What happens to payments in a temporary annuity if the individual dies before the agreed term ends?

    <p>Payments cease and no further income is paid (C)</p> Signup and view all the answers

    What guarantees a capital-protected annuity for the investor?

    <p>Return of the initial investment upon death. (D)</p> Signup and view all the answers

    Enhanced annuities typically offer increased rates to which groups of applicants?

    <p>Those with specific medical conditions. (B)</p> Signup and view all the answers

    What differentiates an immediate annuity from a deferred annuity?

    <p>Immediate annuities begin payment right away, whereas deferred annuities start later (D)</p> Signup and view all the answers

    How does choosing to receive annuity payments in advance affect the income received?

    <p>It results in a slightly lower income (D)</p> Signup and view all the answers

    What distinguishes impaired life annuities from enhanced annuities?

    <p>Impaired life annuities are available to those with life-shortening conditions. (C)</p> Signup and view all the answers

    Which statement correctly describes a few types of annuities offered?

    <p>Annuities can be combined in various types such as life and immediate (D)</p> Signup and view all the answers

    In terms of payment levels, how do escalating annuities compare to level annuities?

    <p>They start at a much lower level than level annuities. (A)</p> Signup and view all the answers

    What is a characteristic of a deferred annuity concerning payment initiation?

    <p>Payments begin on a predetermined future date (A)</p> Signup and view all the answers

    What effect does a pro rata payment have if the annuitant dies before the next payment date under a 'with proportion' annuity?

    <p>An amount is paid representing the period from the last payment to death. (A)</p> Signup and view all the answers

    Which of the following is NOT a tax advantage offered by investment bonds to higher- and additional-rate taxpayers?

    <p>Tax-deductible contributions to the investment bond (B)</p> Signup and view all the answers

    What is the primary advantage of investment bonds for pensioners, specifically for higher- and additional-rate taxpayers?

    <p>Tax-free withdrawals of 5% per year for at least 20 years (A)</p> Signup and view all the answers

    How do investment bonds benefit pensioners in terms of later-life care provision?

    <p>They are not included in the calculation of an individual's assets for care fees. (D)</p> Signup and view all the answers

    What is the main reason why most pensioners may not need to utilize investment bonds for tax purposes?

    <p>They have access to other tax-efficient savings products like ISAs. (A)</p> Signup and view all the answers

    What is the primary benefit of utilizing a single-premium bond for investors, specifically in terms of accessibility?

    <p>The ability to invest in specialist geographical sectors with small investment amounts. (C)</p> Signup and view all the answers

    What is the primary advantage of switching between different fund options within an investment bond?

    <p>It allows investors to diversify their portfolio based on market conditions or personal preferences. (B)</p> Signup and view all the answers

    What is a possible drawback of using a single-premium bond for investment purposes?

    <p>Risk of losing a portion of the initial investment. (C)</p> Signup and view all the answers

    What is a crucial factor to consider when investing in an investment bond for later-life care purposes?

    <p>Whether the investment was intended to avoid care fees. (B)</p> Signup and view all the answers

    Study Notes

    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.

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    Description

    Explore the intricacies of life assurance and its role in collective investments. This quiz covers key concepts such as qualifying and non-qualifying policies, premium requirements, and the benefits of whole-life and endowment plans. Test your knowledge on how these products can be used for financial planning and investment.

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