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Endowment policy top-up payments

Category Technical Articles
AuthorTechnical Department
Extract from an article by Adrian Rudd (of PricewaterhouseCoopers, Tax Adviser's representative on Technical Committee) regarding endowment policy top-up payments, recently considered by the Personal Taxes Sub-Committee. (Published in the August 2000 issue of Tax Adviser.) The Personal Taxes Sub-Committee recently discussed the situation of a higher-rate taxpayer, who needs to make additional payments into an endowment policy in order to have sufficient funds at maturity to pay off the mortgage. Any additional contributions made in the last ten years of the policy’s life would not be made into a qualifying policy, and would thus be subject to a higher-rate tax charge net of a basic rate credit (i.e. 18 per cent) on the maturity value of the non-qualifying policy.

The sub-committee understood that the Inland Revenue are aware of the point, but are unwilling to grant concessions to make it easier for individuals to top up their endowment policies in order to ensure the maturity value is sufficient to cover their outstanding mortgages. Ministers would prefer individuals to use existing tax-efficient savings, such as ISAs, to make up the shortfall.

In practice however it would only be in cases where the additional contributions were significant that the top-up payments would be treated as a non-qualifying policy. In general the premiums payable in any one year cannot exceed the lower of

  • Twice the amount of the premiums payable in any other year
  • One-eighth of the total premiums payable if the policy ran for the full term.

Example

Consider a 20-year policy where the monthly premium is £100, with an initial projected maturity value of £45,000.Five years before maturity the projected final value is only £35,000. The projected shortfall of £10,000 is to be made up by increasing the annual premiums to £2,000 for each of the last five years.This level of premium would not compromise the qualification of the policy since the maximum allowable premium payable would amount to the lower of:

  • 2 x £1,200 = £2,400
  • 1/8 x £1,200 x 20 years = £3,000 i.e. £2,400.

Technical Department
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