offshore bonds can offer investors a flexible planning tool that would work in tandem with a conventional pension strategy
In the UK, the weekend papers are currently full of comment on the pensions 'crisis'.
Newly-appointed pensions minister David Blunkett has been coaxed back into power to solve the insoluble - to cut the Gordian Knot of pensions complexity. While he considers the options, those 'stuck' in the system continue to suffer financially and emotionally.
Can't we see the wood for the trees? What is the purpose of a pension? Is it not to provide an income in retirement?
This desirable objective can be achieved in a variety of ways. The traditional route to retirement income is through tax-relieved contributions to a tax-favoured fund with a taxable annuity at a pre-selected retirement date.
There have been variations to this basic model - mainly aimed at introducing a modicum of adaptability to individual needs. Draw-down, phased retirement and variable retirement dates have all done their bit to loosen the straight-jacket and give some flexibility, albeit at the cost of increased complexity.
The basic structure remains as before - relatively generous contribution limits but restricted post-retirement access, front-end tax relief, back-end tax charge. Will A-Day change this?
In the words of Paul Daniels, " You'll like this - but not a lot".
For many 'internationally mobile' individuals and for those adversely affected by the latest in a seemingly never-ending series of pension reforms, a more radical approach to retirement planning is required. A conventional pension will still form part of any strategy but other retirement planning techniques will have to be used to meet the needs of clients.
An offshore bond must come into the reckoning as a retirement planning tool. It will not be a panacea but must be considered by the planner.
Why? An offshore bond offers what a pension lacks - flexibility. The price to pay is the loss of tax relief at inception. The attraction is a fund taxed identically to a UK approved pension and exit flexibility.
The owner can draw from the bond as and when required; the amount drawn can vary in quantity and timing and, with some planning, the sums drawn can be free of an immediate tax charge through thoughtful use of the 5% rule. No taxed annuity here.
What happens on death? The residual fund passes to the next generation and, with some careful planning, this inter-generational transfer can be accomplished without an inheritance tax charge.
For the increasing number of UK residents who wish to retire overseas, an offshore bond can, in some circumstances, offer complete tax freedom. The prospective emigrant must of course check the tax position in their new country of residence and remember that the UK tax code applies only to the UK - an obvious point, perhaps, but one that is often overlooked.
Pensions have their place, indeed a pre-eminent place, in financial planning. But we must also be constantly aware of their limitations.
The goal of retirement planning is to meet financial needs in later life. That goal can be scored with the assistance of a variety of financial products. With this in mind, an offshore bond must at least be considered as part of a retirement strategy.
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