Sweeping changes of the UK pension regime which came into force on 6 April (A-Day) have opened up a ...
Sweeping changes of the UK pension regime which came into force on 6 April (A-Day) have opened up a number of opportunities for the offshore market, according to Andrew Tully, marketing technical manager at Standard Life and a spokesperson for the Association of International Life Offices.
He said while offshore bonds were not a pension alternative in their entirety, they provided an invaluable tool for retirement planning by working in tandem with a UK pension.
"The aim of A-Day was to simplify the pension regime and move eight existing tax tiers into one, making it much more flexible then it used to be."
Tully said one of the greatest advantages of a UK pension was the tax relief, for example, every £78 put into a pension, there is £100 working for the investor.
The pension fund also grows virtually tax-free, while 25% of it can be taken as tax-free cash. Pension income is taxed at a marginal rate and relief is available on a personal allowance.
He added: "There are no limits to how much money can be put into a pension, but there are tax implications. There is a lifetime allowance of £1.5m with a 55% tax charge on any excess. The minimum benefit age will also be increased to 55 by 2010.
"This compares to an offshore bond where a fund grows virtually tax free and 100% of the original investment can be withdrawn without penalty. Gains are taxed at either a savings rate or higher rate."
Tully explained that while there was no tax relief on contributions, there was relief available by way of personal allowance, top-slicing, time apportionment and tax-free assignment.
Tully said there were a number of people who would benefit from an offshore bond, including:
People who reach the lifetime allowance of £1.5m and are looking for an alternative savings vehicle.
People who plan to retire abroad.
People who do not benefit from tax relief on pension contributions, or are already receiving maximum tax relief.
People who want to take benefits before 55 and use it as bridging income.
Those looking for a home for pension tax-free cash.
People wanting flexibility including tax deferral and tax efficient access to capital.
He added: "People will not want to pay over the £1.5m cap and will be looking at alternative means for their savings. However, it is a simple fact that over time more people will be caught by the lifetime allowance."
For example, if a 40-year-old male had a pension of £750,000, and assuming it grew at a rate of 6% each year without any further contributions being paid and the lifetime allowance (initially £1.5m grew by 2.5% each year) the pension would exceed the £1.5m cap by the retirement age of 65.
However, Tully said this could be overcome if the cap was taken into consideration when retirement planning at an early age.
Using another example, he said if an individual aged 45 with plans to retire at 65, had £100,000 to invest, he could opt to split the money 50/50 into an offshore bond and pension. For the next 20 years he could drip feed £2,500 per year out of the bond into a pension which grosses up to £3,205 with tax relief. Assuming 6% growth per year, there would be a 4% difference in the final fund.
Tully added: "This is the cost of flexibility and control. At the end of the 20 years, the growth on the bond would also be taxed at 20%, but there are ways we can mitigate against this."
Tully concludes: "Pensions have changed dramatically since A-Day and these changes are having a positive affect on the offshore market, which offers complimentary products. A holistic approach using offshore bonds and pensions together could minimise tax and maximise flexibility, providing great opportunities for ongoing advice."
While offshore bonds should not be viewed as an alternative to pensions they can be a valuable investment tool
By using an offshore bond, a fund can grow virtually tax-free and 100% of the original investment can be drawn at any time, without penalty
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