Friends Life Investment Bond Guide. Provided by: Brought to you by:

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1 Friends Life Investment Bond Guide Provided by: Brought to you by:

2 Investment Bond Guide CONTENTS Contents Introducing our Investment Bond 3 Investment Bond charges 4 Investment funds 6 Managing your Investment Bond 7 Taking withdrawals 9 Tax and your Investment Bond 10 For more information 12 Welcome to the Investment Bond Guide. This guide is not designed to provide you with advice on the suitability of this investment as this will depend on your personal circumstances, approach to risk, and how long you are looking to invest for. A decision to invest should not be made on the basis of this item alone and financial advice should be sought. Please note your financial adviser may charge you for any advice provided. You should also read: the Key Features of the Investment Bond your personal illustration provided by your financial adviser the Investment Bond Fund Guide. 2

3 Introducing our Investment Bond What is the Investment Bond? Our Investment Bond is a flexible life assurance based product for investing a lump sum of 5,000 or more. For bonds that have already been set up, you can invest additional sums of 2,000 or more. It is designed to be invested for a medium term (at least five years) to long term (over ten years). So it may not be suitable if you re investing for a short period of time or if you need instant access to your cash. The bond aims to increase the value of your investment and can also provide regular or one off withdrawals. You will be investing in different types of assets such as Money Market, Fixed Interest, Property and Shares. You need to be aware that the value of your investment could go down as well as up and is not guaranteed, so you could get back less than you invest, especially if you cash in the bond in the early years. Income taken from the bond is actually a regular withdrawal of capital. Who can invest in it? You can invest alone or with one other person but the youngest planholder must be at least 18 years old when the bond is taken out. Up to nine lives insured can be named on your Investment bond. These are the people that will be covered by the life assurance element of your bond. Your bond will keep running until the death of the last life insured. At least one life insured on your plan must be 79 years or younger when the bond is taken out. 3

4 Investment Bond charges Investment Bond Guide Investment Bond charges Before you decide whether our bond is suitable, you need to consider the following pricing information and charges. Tiered Allocation Your bond will be set up using tiered allocation rates, which vary by the size of your investment amount and the age of the youngest life insured. There is a higher Yearly Management Charge for the first three years to pay for the cost of setting up your bond and a loyalty bonus is payable in year 10. Early Cash-in Charges apply if you cash in all or part of your bond in the first five years. Allocation Rates An allocation rate is the percentage of your investment we invest in the funds you choose. Please note that the actual terms offered may be different from those shown in the table. Please refer to your personal illustration for details. Tiered Allocation Size of your investment Age 64 or under Age Age Under 50, % % % 50,000 and OVER % % % Charges explained The charges we take cover the cost of setting up your bond which may include the cost of commission, which will be shown on your illustration. They also include the cost of administering your plan and professionally investing your money and an element of life insurance cover. However, they do not cover any fee you may have to pay your financial adviser. Charges can reduce the potential for growth and/or income of your investment. Please remember that Friends Life can vary the charges at any time in accordance with Part D of the Investment and Trustee Bond Plan Booklet. Yearly Management Charge There is an ongoing Yearly Management Charge, calculated as a percentage of the value of the Fund. The percentage is higher for the first 3 years. Investment Term Yearly Management Charge* Years % Years % Year %* Years % * A Loyalty Bonus of 1.00% is added to your bond during its 10th year. This is achieved by reducing the Yearly Management Charge during year 10 from 1.20% to 0.20%. There may be Additional Yearly Fund Charges depending on the funds you choose. We add these to the Yearly Management Charge detailed in the table above. There may also be a One-Off Charge when you invest in or switch into some funds. Please see the Investment Bond Fund Guide for further information. 4

5 Investment Bond Guide Investment Bond charges Early Cash-in Charges Early Cash-in Charges will apply during the first five years of the initial payment and any extra payments into the bond, if you withdraw more than 7.5% of the value of the bond in any one plan year. This charge does not apply in the event of your death. Currently, Early Cash-in Charges will not apply on regular withdrawals of up to 7.5% per annum, including any distributions or payments from our income producing funds. Details of these funds can be found in the Investment Bond Fund Guide. The charges are calculated as a percentage of the amount you withdraw. So for example if you have 50,000 in the bond and you withdraw 4,000 in year 1, the Early Cash-in Charge would be 12% of 4,000 = 480 and you would receive 3,520. After the first five years, your bond continues and Early Cash-in Charges will no longer apply. Any extra payments, however, will have their own five year Early Cash-in Charge periods. Year Charge as a % of unit value cashed-in 1 12% 2 10% 3 8% 4 6% 5 3% You should be aware that withdrawals in any one plan year of more than 5% of the original amount of your investment may be subject to higher rate income tax. Please see page 11 for further details. If you take advice from a financial adviser and make an extra payment into your Bond different charges will apply. If you do this your financial adviser will discuss the charges with you. 5

6 Investment funds Investment Bond Guide Investment funds Your investment options You can choose to invest in up to 30 funds at any one time from a broad range of available funds. Fund charges vary depending on the funds chosen and will reduce the potential for growth and/or income. There is no minimum investment per fund. For more information about our funds please see the Investment Bond Fund Guide. You can switch between funds You can normally switch money between funds at any time. All switches you make are currently free of any switch charge. Friends Life reserves the right to introduce a charge in the future. Please refer to Section Three of the Investment and Trustee Bond Plan Booklet for more information. A one-off charge may apply when switching into some funds. Further information can be found in the Friends Life Investment Bond Fund Guide. Friends Life reserves the right to delay any transactions in the funds, such as surrenders or switches. This could happen, for example, when dealings on a stock market exchange are suspended. The delay could last up to one month or, for funds that invest in property, up to six months to allow property to be sold if necessary. In unusual or exceptional circumstances, we may extend these periods for as long as is necessary and we think is fair to the policyholders invested in the fund. We would later process any delayed transaction using the unit price at the time the transaction takes place, not the date that it was requested. Please see the Investment and Trustee Bond Plan Booklet for further details. 6

7 Investment Bond Guide Managing your Investment Bond Managing your Investment Bond How do I check the value of my bond? Each year we will send you a valuation statement. You can also phone our dedicated customer services team on who will give you a valuation over the phone. Alternatively you can check the value of your bond online. Log on and register at investments to: view the current value of your bond; check the price of units in your fund or funds; check and change your personal details; and switch funds. Can I make extra payments? Yes, you can make extra payments of 2,000 or more at any time as long as the youngest life insured is 79 years old or under when making the extra investment. Please note that we can change the minimum investment amount. All extra payments are treated as new investments for charging, allocation rate and loyalty bonus purposes. You should remember that the value of your additional investment as well as your original investment amount can fall as well as rise and is not guaranteed. What happens if I cash in my bond early? Before cashing in your bond, we recommend you speak to a financial adviser to assess your options. Please note that you may be charged for any advice provided. Our Investment Bond is designed to be held for the medium term which is at least five years to long term which is over ten years. So it may not be suitable if you are investing for a short period or need instant access to your money. If you cash in your bond in the first five years or within five years of an additional payment you may have to pay an Early Cash-in Charge (full details can be found on page 5) and you are more likely to receive back less than you paid in. Friends Life reserves the right to delay payment for up to one month, and up to six months for any fund that invests in property. In exceptional circumstances these periods may be extended where this is fair to policyholders invested in a fund. If you cash-in your bond you may be subject to a tax liability. Further information on the tax implications of cashing-in your Investment Bond can be found in the section Tax and your Investment Bond on page 10. You will need to send us your bond documents and any other documents that prove your ownership. What about life cover? An element of life cover is provided by the Investment Bond. The cost of life cover is included in the charges we take. The life cover is based on the lives of the people you have named as the life/lives assured on your application form. It is possible to name up to nine lives assured. This can be beneficial as it means that if you die and are survived by another life (or lives) insured, the bond will keep running rather than be automatically cashed-in on your death. Having control over when the bond is cashed-in is important because it can help with tax planning and/ or trying to ensure that the investment has had long enough to achieve any potential long term investment objectives. If you are a Trustee(s) investing in the bond, then ownership will not be affected by the death of a Trustee (the planholder(s) ) as the investment has been made on behalf of a Trust and not in a personal capacity by an individual. 7

8 Managing your Investment Bond Investment Bond Guide How much will my bond pay out on the death of the last life insured? When the last life assured dies, the bond will end and we will pay an amount based on the value of your bond and the date it started. The death benefit value is calculated the next working day following receipt of written notification of death. The table below shows the amounts payable. Plan start date Death benefit Accidental death benefit Before 12 December % N/A 12 December August % 110% 3 August 2006 onwards 100.1% 110% If accidental death benefit becomes payable, it is paid instead of the death benefit. Exclusions to accidental death benefit apply and can be found in Section 2 of the Investment and Trustee Bond Plan Booklet. Please see the section Tax and the Investment Bond on page 10 for information on the tax implications of cashing in your bond or on death. 8

9 Investment Bond Guide TAKING WITHDRAWALS Taking withdrawals How to take money out of your bond Taking regular withdrawals You can set up regular withdrawals from your bond at the outset or at any time during the life of your bond. Regular withdrawals can be paid: Monthly; Quarterly; Every six months or Yearly. Your regular withdrawal can be set up as either a fixed monetary amount, as a percentage of your original investment or as a percentage of the current value of your bond. If you take regular withdrawals as a percentage of the current value, the actual amount of withdrawal, as well as the capital, can fall as well as rise. You can currently withdraw up to 7.5% of the value of your bond as income per plan year without incurring any Early Cash-in Charges. If you do not use the 7.5% allowance it cannot be rolled over to subsequent years. If however you withdraw more than 7.5% of the value of your bond, this is treated as a partial cash-in and Early Cash-in Charges may apply. Any withdrawals above 7.5% per plan year of the value of the bond cannot be made regularly. If you withdraw more than 5% of the original amount of your investment in one plan year, you may be subject to an immediate tax liability. For details, please read the next section on taxation. The minimum regular withdrawal amount is currently 50. Payments will be made by BACS transfer to a UK bank or building society account of your choice. As with fund switching, Friends Life reserves the right to delay payment for up to one month and six months for any fund that invests in property. In exceptional circumstances these periods may be extended where this is fair to policyholders invested in a fund. We have designed some funds to specifically provide an income. Details can be found in the income producing funds section of the Investment Bond Fund Guide. It s important to know that if you take regular withdrawals from your bond, the value of your investment may fall below its original level especially if income is taken immediately or shortly after the bond is taken out or at times when investment performance is poor. In addition, the more you take out, the more the potential for future growth will be reduced. Taking one-off withdrawals You can take one-off withdrawals, known as partial cash-ins, if you need some extra money. Early Cash-in Charges may apply. There is a minimum withdrawal of 250 and you must leave a value of at least 1 in each fund after any outstanding Early Cash-in Charges. Taking money out of your bond will increase the risk that the value of your fund may fall below the amount you originally invested. Your Investment Bond is split into 100 individual policies. If you make extra payments, this money is split equally across all policies in your bond. There are two different ways to take partial cash-ins and both may result in Early Cash-in Charges. Units can be cashed-in from the earliest investment available and not proportionally across all investments. This can reduce the impact of Early Cash-in Charges as partial cash-ins will be taken from the earliest investment first. However it will reduce the amount of the total investment benefiting from lower charges where these reduce with time. The second option is to request for a number of the 100 equal policies, under the Plan, to be cashedin. In this case, the units are cashed-in across all segments because each policy is split equally across all segments. Therefore, Cash-in Charges may be higher in this scenario. Unless you ask us not to, we will cancel units across all policies. Depending on a number of factors, such as the value of the bond, how much you are cashing-in, when you made the investment and your tax position, cashing-in one or more individual policies may be more tax efficient. From a legal and taxation point of view any withdrawal taken from your bond is considered a withdrawal of capital and is subject to special income tax rules for calculating and assessing the amount of income tax liability that may arise on a chargeable gain. Please see the following section Tax and your Investment Bond for more information on how making withdrawals can affect your tax position. 9

10 Tax and your Investment Bond Investment Bond Guide Tax and your Investment Bond How and when tax applies It s always good to know exactly what you are investing in and how your investments may affect the amount of tax you have to pay. The following information is based on our interpretation of the current tax regime. Of course, tax rates and rules could change in the future and you should also bear in mind your personal tax position will affect the value of any tax benefits. Future legislation may change this information, so it might help you to review this section with your financial adviser. Tax and you Tax and Friends Life You have no personal liability to capital gains tax or the basic rate of income tax under the Investment Bond. However, if you are a higher rate tax payer you will have to pay income tax on any chargeable gains (see below) when you take money from your bond, although your liability would be limited to 20% (the difference between higher rate tax and basic rate tax for the 2012/13 tax year). With effect from 6 April 2010 an additional higher rate of income tax of 50% was introduced. This applies to those with taxable income over 150,000. If you fall into this category when you make withdrawals from your bond (over the 5% entitlement) or make a profit on full surrender or death, the tax payable would be limited to 30% (the difference between the additional higher rate and the basic rate). Note: From 6 April 2013 the additional higher rate reduces to 45% for those with a taxable income over 150,00; tax payable would be limited to 25% (the difference between the additional higher rate and the basic rate). The funds that your bond invests in are taxed as assets of ours, rather than that of the individual investor. Taxes on an investment fund and on the income the fund receives are paid for out of the fund, which will reduce the unit price and therefore the value of your investment. So taxes on an investment fund and on the income the fund receives are paid by the fund and are reflected in the unit prices. The amount of tax on income and capital gains payable by us on the fund(s) will not normally exceed 20%. If the fund(s) holds any overseas investments then tax will be payable in the country where they are held. If this tax exceeds 20% then the additional amount will be charged only to those fund(s) that hold the overseas investments. Tax and chargeable gains Any withdrawals from your bond, or any profit made from cashing in your bond, are subject to special income tax rules for calculating and assessing the amount of any income tax liability that may arise on a chargeable gain. Any chargeable gain you make on withdrawals or by cashing in all or some of the individual policies of your Investment Bond will be free from capital gains tax and the basic rate of income tax. Tax and withdrawals You can currently withdraw 5% of the original investment amount each plan year for 20 years and defer any tax until the bond is cashed in. If you do not take the full 5% entitlement in any year, the unused amount can be carried forward for use in future years. Withdrawals will be taken into account on the final encashment of your bond to see what tax (if any) should be paid. 10

11 Investment Bond Guide TAX AND YOUR INVESTMENT BOND Withdrawing more than 5% in any plan year At some point you may want to withdraw more than the 5% entitlement please be aware this could result in an immediate tax liability. Any amount above the 5% entitlement must be added to your other taxable income to see if tax should be paid at your higher rate at the time the withdrawal is made. If the extra amount (the chargeable gain) doesn t cause your taxable income to go over the higher rate tax limit, then you will not pay tax on it. If it does, then you must pay tax on the extra amount which exceeds the higher rate tax limit or additional higher rate tax if applicable. The rate of tax you will pay will be the difference between the higher rate and the basic rate of tax applicable at the time or additional higher rate tax if applicable. Cashing in your Investment Bond, individual policies or on death Here is a summary to cover the tax position in the event that: You completely cash-in your Investment Bond You cash in individual policies of your Investment Bond; or The Investment Bond is cashed in as the last life insured has died. Any chargeable gain made by cashing in some or all of your plan s 100 individual policies (your bond is split into 100 policies for tax efficiency), will be free from capital gains tax and the basic rate of income tax. You would only pay tax on a chargeable gain if your taxable income from all sources including the average gain (see following section Calculating the chargeable and average gain ) would make you liable to pay tax at the higher rate. The Investment Bond will keep running until the death of the last life insured. The value of the bond on death is subject to the calculation of a chargeable gain that may result in a tax liability. Calculating the chargeable and average gain A chargeable gain is worked out by using the formula (A-B) + (C-D) where: A B C D Is the cash-in value of the policies cashed in Is the amount invested in the policies cashed in, including any extra investments Is the total of those amounts previously withdrawn from the policies cashed in Is the total of the amounts previously withdrawn that are above the 5% entitlements you are allowed, from the policies cashed in. If you die, any amount payable under the terms of the Investment Bond in addition to the cash-in value of the policies is not treated as a chargeable gain and is therefore free of any liability to income tax and capital gains tax. If you are a basic rate taxpayer or a non-taxpayer, you can average the chargeable gain to reduce or eliminate any further tax liability. The average gain is calculated by dividing the chargeable gain by the number of complete plan years you have held the policies that are being cashed in. If the average gain, when added to your other income, falls below the higher rate tax threshold, no further tax is payable. If the average gain, added to your other income, exceeds the threshold, the excess amount is subject to tax at an extra 20%. The result is then multiplied by the number of complete plan years you have held the policies to find the tax payable on the chargeable gain. Tax allowances and tax credits Any chargeable gain on withdrawals, or cashing in some or all of the individual policies of your Investment Bond, or on death, will be added in full to total income for determining the availability of any age related allowance(s), child tax credits, or working tax credits. The availability of the personal allowance is restricted for those with total income over 100,000. If a chargeable gain, when added to your other income, causes you to fall into this category your personal allowance may be reduced. Speak to your financial adviser for more information on tax and your Investment Bond. Your financial adviser may charge you for any advice provided. 11

12 For more information To find out more about our Investment Bond, simply contact your financial adviser. Alternatively you can contact us in the following ways: Online at: Write to us at: Friends Life, PO Box 1810, Bristol BS99 5SN. Call us on: As part of our commitment to giving you quality service, telephone calls may be recorded. BANCIBGUID 10/12/12 The address for written communication is Friends Life, PO Box 1810, Bristol, BS99 5SN. The telephone number of Friends Life is Friends Life Services Limited distributes and administers financial products and services and is authorised and regulated by the Financial Services Authority, register No ( A company limited by shares, registered in England No , registered office: Pixham End, Dorking, Surrey, RH4 1QA. As part of our commitment to quality service, telephone calls may be recorded.