Comparison Of Life Insurance Quotes

A point that must be noted is the effect of the final encashment of income bonds on age allowance. The age allowance is an extra personal allowance granted to those aged over 65. For the fiscal year 1978/79 a married couple (over 65) will be allowed personal allowances free of income tax of £2,075 (instead of the normal £1,535) provided that their taxable income does not exceed £4,000. (If it does, the extra allowance is reduced by £2 for every extra £3 of taxable income.)

The bulk of the income from guaranteed bonds is not taxable and therefore does not count towards the limit: thus if £10,000 is invested in a guaranteed income bond yielding 8% net, only the “excess” of 3%, i.e. £300 a year, is regarded as part of taxable income for age allowance income limit purposes. Income bonds are often, therefore, a more efficient source of income for the retired than, say, building societies, since in the latter case all the grossed-up equivalent of the net income is taken into account.

However, in the year of encashment of an income bond, there will be a gain (on the capital portion) which will be subject (normally) to higher rates of income tax and invest­ment income surcharge. For the purpose of these two taxes, the gain is “sliced” over the period for which the bond has been held, and normally this will mean that any tax payable is small except for very high rate taxpayers.

However, for the purposes of the age allowance income limit, no top slicing is allowed and the whole of the taxable gain is regarded as part of the income in that tax year. This will very often mean that age allowance is restricted in the year of encashment, which means the individual will pay more income tax. However, this tax liability in an encashment year should not be looked at in isolation but related to the tax savings in the previous years. Most investors will achieve an overall gain in net income from income bonds over the holding period.

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