Steven Whalley puts forward his views as to why offshore contracts should be an important consideration in a retirement planning strategy
'Can't cook, won't cook' was a popular TV programme presented by Ainsley Harriot. I wonder how many viewers would have tuned into a programme called 'Can't contribute, won't contribute'? If a viewer was lucky enough to watch it, they may see a section on offshore life contracts and how they can be used in retirement (rather than pension) planning.
There are a number of client types who could consider an offshore contract as part of their retirement planning. They are:
- the disenchanted high net worth;
- the unable (the so-called pension contributing challenged);
- the geographically mobile executive;
- the future expatriate;
- the reluctant annuity buyer.
Before looking at each of these and how offshore contracts can fit into their retirement plans, it's worth just reminding ourselves of the key benefits of offshore contracts.
Like a pension, the fund grows free of tax, except for withholding tax on dividends. Also, over 20 years, 5% (of the original investment) can be withdrawn each year with no immediate tax to pay. Moving from one investment (often an OEIC or unit trust) to another, within the contract, does not give rise to capital gains tax.
However, offshore contracts don't have tax relief on the contribution and there's tax on the gain when there's a chargeable event which is mainly when benefits over the 5% limit are taken.
The investment choice within offshore bonds is vast. A SIPP supermarket may have 2,000 investments to choose from but an offshore bond is truly open architecture, offering an even greater investment choice. For example, there are details of over 10,000 collective investments on the ASEI website (with the ability to filter on given criteria). While they've not all been confirmed as an acceptable asset, the vast majority will be. Access to such a wide investment choice is a major benefit to offshore investors.
The first client type is the disenchanted high net worth investor. The attraction of the offshore contract for them relates to how and when they can take benefits. With an offshore contract, there are no restrictions on when you take the benefits (although there may be charges in the early years). Sportspeople, for example, would be looking for plans from which they can take the benefits before they reach their 50s. There is also no restriction on taking the monies - all of the money can be taken as a lump sum - avoiding the need to take an annuity. From a tax point of view, if an annuity has to be taken then it is difficult to avoid paying tax. With a bond, as the tax arises on a chargeable event, it is possible to manage affairs so monies are taken when there is little or no other income. This makes the benefits from the bond tax-free or with minimal tax. Providers offer their bonds in many segments allowing even more effective planning around taking benefits.
The type of client classed as the 'unable' is the employed executive who can't put any more money into their pensions - for example, those who have opted for enhanced protection and so alternative ways of providing funds at retirement are necessary. Similarly, those who are near to the lifetime allowance may well feel they can't pay more as it may jeopardise the favourable tax treatment they're entitled to. A senior executive may be able to arrange for the extra payment to be made into an offshore contract to replace the contributions that would otherwise have been allocated to pension provision. Again, you could consider an offshore bond as a suitable alternative.
The next client type is the geographically mobile executive. In 2007, there were 5.5 million British citizens living abroad (Source: Institute of Public Policy research 2007). Some of these people work abroad and some of them may be prevented from joining a UK pension scheme. In that case, their salary could be increased and the money invested in an offshore contract. This means that, subject to local rules on bond taxation, they won't pay tax on the growth when they're abroad and they can take benefits wherever it suits them (in whichever country is most tax-efficient). If that is the UK, then there would not be UK tax on the time the policyholder was abroad - this is known as 'time apportionment relief'.
The next client type is the future expatriate. In 2001/2, there were over 200,000 UK residents with properties abroad. Spain and France are popular. (Source: Office of National Statistics 2006). These are potentially future expatriates who will benefit from virtually tax free growth while in the UK and will pay the tax in the country they take their benefits. This may be lower (or higher) than the UK. This compares favourably with an onshore bond where they'd have to pay the local personal tax on top of the tax paid within the bond that they can't reclaim or offset against the local tax.
The final client type is the reluctant annuity buyer. An individual's investment money (rather than pension fund money) is accumulated with a view to providing an income in retirement. Additionally, the tax-free cash from a pension can be used to the same ends.
However, industry figures indicate that the appeal of a traditional purchased life annuity is quite low. There are offshore bond offerings that pay a guaranteed income for life no matter what happens to the capital value (due to stockmarket conditions) or despite the fact income is withdrawn. Different plans have the income taxed differently. It can be taxed as withdrawals from a bond, where the tax is deferred, or as a purchase life annuity type treatment with a large tax-free capital element. Income levels can increase depending upon fund performance.
So offshore contracts can compete with pensions when it comes to retirement planning. However, they are also a useful complement to pensions and should be seen as a useful component of any retirement planning strategy.
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