I am managing finances for my Mum who has gone into a care home...
In 2004 she put £7k into a Halifax PIP.
It is now worth about £10k. It is mostly standard equity stuff but from the poor performance I suspect the charges are pretty significant.
On a quick reading, one can cash in a max of 5% of the original investment per year (i.e. £350/year) before one starts to pay tax on the profit. And the tax is not CGT, it is income tax!
Am I right in that if the whole lot is cashed in, there will be a basic rate tax liability on the £3k or so?
The £350/year is not a good option because she is now over 80.
I am trying to liquidate the worst performing investments she has.
Any advice would be much appreciated. My accountant doesn't know anything about this and uses an IFA and it all gets very expensive.
AFAIK the Halifax PIP is basically an insurance bond and comes under life assurance rules. If it is, then if you encash it the amount over and above the original investment amount is subject to higher rate tax less the basic rate (40% - 20% = 20%) but only if the encashment pushes you into the higher rate tax band in that year. So, there is NO liability to basic rate at all, only the 20% as calculated above.
Your mother's personal allowance is £9,640 and the higher rate starts at £37,401. So unless her income in the year of encashment (including the gain on the investment) is more than £9,640 + £37,402 = £47,041 she won't have to pay anything.
The 5% of which you speak is the amount she could withdraw per year without any liability to higher rate tax. If she HAS made any withdrawals these will be deducted from the original investment amount and effectively produce a higher gain when the final calculation is made. She can make 5% withdrawals a year for 20 years. 5 x 20 = 100% and this means that she will have withdrawn all her original capital and further withdrawals are liable for immediate tax calculation.
You are right in saying that there is no CGT, the liability (if any) being to income tax.
BTW, never buy any financial product from a bank if you want good value!
Mum's income is about 12k in pensions and a few more k on other stuff, paid mostly with basic rate tax deducted.
ISTM that this is not a good product to sell to somebody who is 74 at the time because the person is most unlikely to be able to draw out any significant amount at the 5%/year rate.
Curiously the Halifax brochure says (AIUI) that you are liable to basic rate tax on the gain.
I plan to churn her equity investments to crystallise the 10.2k/year CGT allowance. But this one seems like it's best to get shot of it altogether.
I imagine the 5% is a government (HMRC) restriction.
However, my big concern here is that you don't seem to understand the basis on which your mother made hef financial decisions. Your duty as an attorney is to manage them as near as possible as she would have when capable, taking account of the new circumstances, and given sound advice. Even now, you should be involving her to any extent of which she is capable.
You need to find out why she bought the PIP, and judge it against those reasons,
To the extent that you are unable to get any valid opinion from your mother on investment policies, even allowing for past history and what friends of hers say, I would say that your situation was similar to that of a trustee. For a trustee, any investments, beyond a bank/BS trust account, must be based on professional advice. Where your situation differs from a trust is in the need to take account of her attitude to investments.
That's incorrect, or you've misread it. Because it's an insurance product it comes under insurance contract rules and HMRC allow that basic rate tax is deemed to have been paid (because the fund managers have to pay tax to the Revenue, thereby reducing its growth - unlike OEICs and unit trusts). So the only tax that remains to be paid (assuming that there has been sufficient growth - as I expalained before) will be higher rate minus the basic rate, i.e. 20%. But at her level of income this won't happen.
Sometimes people encash only part of their bond. This can be very dangerous because the cost of the bond does not get taken into account and the whole proceeds are deemed to be income in that year and taxed accordingly. Beware the partial encashment! e.g. cost of bond £50,000. Growth on bond £10,000. Partial encashment of £55,000. Add the £45K to your income and you get a nasty shock.
There are ways to help to mitigate this, so let's not get too heavy!
That's as may be, but it may also be that she herself did not understand the basis and was simply a victim of a slick sales pitch by an "adviser" working for Halifax.
It would be interesting to discover why this product was recommended. Does she, I wonder, still have the "reason why letter" which, I think, the adviser would have been obliged to provide?
I agree with the last sentence, but not necessarily with the penultimate. By the sound of what the OP has said, it is not 100% clear whether she is in a care home for physical or mental reasons, nor is it clear whether he has power to sign stuff on her behalf. If she is mentally capable of making financial decisions and understanding the issues involved, his duty is to explain, advise, and then act as instructed (though it may be that the instructions would be "I can't be bothered with all this, son, just you do what you think is best"). Depending on the quality of her capability, his advice may involve more or less firmly steering her in the "right" direction, whatever he judges that to be, but he must be careful of any potential conflict of interest. As a son, he may be doing what's best for himself as a future heir.
A little difficult since she has moderate dementia (diagnosed, and why she went into a care home) and doesn't remember anything about any of her investments....
However I am sure the simple answer why she bought this is because a salesman from Halifax sold it to her.
Even in her last days at home, when she was really confused, she was getting calls from these salesmen almost daily. Britannia BS in particular was pestering her constantly; luckily they called her once when I was there so I put a stop to it for good. It would have been obvious to the salesmen that the client is not comprehending; the reason they can continue is because a "yes" in a phone call is enough to set up most contracts, and to clinch their commission.
She was also pestered by utility companies. She got one sales call which got her to move electricity and gas and phone to one firm, which she did, then she got another call a few months later which got her to move it to another company, which she did, but this 2nd company did not do the phone part so that would have reverted to BT, but the salesman for the 1st company then got on the phone claiming her line will be cut off if she moves (a lie), and she got scared and called me to sort it out. Then she got a call from a 3rd company which got her to move it yet again - that was Npower and she was still with them (and BT) till the end.
This is just a tip of a huge iceberg - ask Age Concern or anybody else who deals with old people. They are easy prey for phone salesmen.
As is common with dementia, she lost her ability to understand complex stuff (like the above) long before she lost the ability to cook her food etc.
The performance of this Halifax PIP is well below a FTSE100 tracker so what's the point, in the long term, for somebody who pays income tax (due to pensions) but makes no use of their 10.2k CGT allowance? The actual thing is invested in unit trusts anyway (40% FTSE for example).
She was also the victim of a ponzi scam which cost her £5000. She was introduced into that by another family member ;) It was paying (well, for a while, anyway, until the bloke got arrested) 8% per month. This happened later in her condition; I doubt she would have gone for it when she was totally with-it.
It was done in 2004. I have no papers relating to it. Everything up to about 2007 has been disposed of, as far as I can tell.
I have a registered LPOA for both health and property. Mum is in a care home with dementia, as I wrote earlier. There is nothing fishy going on here. I am just doing my best to manage her investments, to pay for her £650/week care home. Luckily she has enough, but some of it was a bit dud.
What you could do is to write to the Halifax and say that you suspect the product may have been mis-sold. Then it's up to them to prove it wasn't. Don't write a long letter, just a one-liner. It'll cost you nothing.
If they come up with something that doesn't stack up, then tell them. If no joy, go to the Ombudsman. But you may need someone to tell you if the letter is OK or not. Sometimes they pull the wool over your eyes and you might not necessarily know. I've seen letters that are just flannel.
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.