Question
I have been advised by my IFA To take out a "qualifying savings plan" for 10 years to build up a tax free fund to pay for my kids university fees. He said if I pay in 12 k p.a. There will be life insurance built in of 90k. What is the tax position after 10 years? Does the life insurance remain? Are these plans a good idea? Is there a downside?Answer
The IFA is recommending what is generically called a 'Maximum Investment Plan' (MIP) - a type of endowment policy that focuses more on investment than life insurance
The 'qualifying' bit refers to a 'qualifying policy' which means provided you make the monthly/annual contributions for at least 10 years or three quarters of the term, whichever is lower, there'll be no further tax to pay at maturity/surrender.
However, it won't be tax-free, both income and gains will be taxed at basic rate within the policy along the way. So there's no tax saving for basic rate tax-payers.
Are they worthwhile for higher or top rate taxpayers?
Maybe, but they rank a fair way down the list of tax efficient investments. Better to use your ISA and capital gains tax allowances first (including those of your spouse if relevant) as well as a pension (if appropriate) and consider VCTs and EISs - although these can both be risky so be careful (see our specialist investment page for more info).
If you're already taking advantage of the above tax allowances (or at least the ones you're comfortable using) then a MIP might be worthwhile.
The main drawback (aside from not being as tax efficient as the allowances listed above) is that you're committed to making the £12,000 annual contribution each year for the next 10 years. Fail to do so and you could face a penalty and/or tax bill for doing so.
Qualifying policies also tend to pay high sales commissions - a commission based adviser might receive around £6,000 upfront for selling you a £12,000 a year MIP. Commissions ultimately come out of the charges you pay so it should prove much cheaper to buy a MIP via a fee-based adviser with a sensible rate card.
And if you do consider a MIP make sure it's with an insurer that offers a decent investment choice, including funds from other fund management companies, with reasonable charges.
Unless it would otherwise be very expensive for you to attain life cover then I'd largely ignore the cover via a MIP. It's low in the scheme of things (75% of the total premiums payable - the minimum allowed for a policy to be 'qualifying') and doesn't last beyond the policy itself.
You can read more about qualifying policies on our life investments page.
I have been advised by my IFA To take out a "qualifying savings plan" for 10 years to build up a tax free fund to pay for my kids university fees. He said if I pay in 12 k p.a. There will be life insurance built in of 90k. What is the tax position after 10 years? Does the life insurance remain? Are these plans a good idea? Is there a downside?Answer
The IFA is recommending what is generically called a 'Maximum Investment Plan' (MIP) - a type of endowment policy that focuses more on investment than life insurance
The 'qualifying' bit refers to a 'qualifying policy' which means provided you make the monthly/annual contributions for at least 10 years or three quarters of the term, whichever is lower, there'll be no further tax to pay at maturity/surrender.
However, it won't be tax-free, both income and gains will be taxed at basic rate within the policy along the way. So there's no tax saving for basic rate tax-payers.
Are they worthwhile for higher or top rate taxpayers?
Maybe, but they rank a fair way down the list of tax efficient investments. Better to use your ISA and capital gains tax allowances first (including those of your spouse if relevant) as well as a pension (if appropriate) and consider VCTs and EISs - although these can both be risky so be careful (see our specialist investment page for more info).
If you're already taking advantage of the above tax allowances (or at least the ones you're comfortable using) then a MIP might be worthwhile.
The main drawback (aside from not being as tax efficient as the allowances listed above) is that you're committed to making the £12,000 annual contribution each year for the next 10 years. Fail to do so and you could face a penalty and/or tax bill for doing so.
Qualifying policies also tend to pay high sales commissions - a commission based adviser might receive around £6,000 upfront for selling you a £12,000 a year MIP. Commissions ultimately come out of the charges you pay so it should prove much cheaper to buy a MIP via a fee-based adviser with a sensible rate card.
And if you do consider a MIP make sure it's with an insurer that offers a decent investment choice, including funds from other fund management companies, with reasonable charges.
Unless it would otherwise be very expensive for you to attain life cover then I'd largely ignore the cover via a MIP. It's low in the scheme of things (75% of the total premiums payable - the minimum allowed for a policy to be 'qualifying') and doesn't last beyond the policy itself.
You can read more about qualifying policies on our life investments page.
Read this Q and A at http://www.candidmoney.com/questions/question447.aspx
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