Where Taxpayers and Advisers Meet

Endowment policy

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Postby adambateman » Sun Nov 13, 2005 4:26 am

I have an endowment policy which is due to mature in the next 5 years, however it is no longer being used to pay off my mortgage which I converted to a repayment in 2000, my question is if I surrender the policy do I have to pay any tax and how would this be calculated, I have paid in about £9500 and the surrender value is about £10500, or if I keep the policy until it matures are any tax liabilities then.

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Postby bob.fraser@towrylaw. » Sun Nov 13, 2005 5:58 am

If you have been paying into the policy for more than 10 years, then it should be a qualifying policy, which means that it would pay out free of tax.
However, this does not mean that it would be be advisable to surrender it. Most of these policies have quite high early surrender penalties, which means that you get little more than you paid in (as you can see). Have you asked for a projection as to the possible maturity benefits? This would allow you to compare the values (taking into account the on-going premiums).
The general rule is not to surrender endowment plans. If it is a with profits plan with a good company, and you really want to surrender it, then as an alternative you could sell the policy on. There is a market for "traded endowmment plans" which often gives a higher value than surrendering it. Search on the internet under "traded endowment plans" for companies specialising in this area.

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Postby King_Maker » Tue Nov 15, 2005 8:07 am

If you are the original policy holder (most likely), any tax liability will be to Income Tax.

If the surrender is a Chargeable Event. The Life Insurance Company should issue a Chargeable Event Certificate containing all the relevant details.

However, if the policy is a qualifying one, then the fact that it has been in force over 10 years, means it should be exempt from tax.

If there is an Income Tax liability, it is only on the profit of £1000, which is the excess of the SV (Surrender Value) over the premiums paid. The maximum rate is 20%, and only applies to HR taxpayers (or those who become so by adding the relevant gain to their income for the appropriate tax year. Top Slicing Relief may prevent/reduce any liability.

If in doubt, I suggest you consult your Endowment issuer to confirm that the surrender is exempt from tax.

I agree with Bob Fraser's points on retention, and looking at the TEP market, if appropriate.

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