Standard Life ezine - Offshore bonds and pensions, working together for a better retirement – Standard Life Pensions Ezine

Standard Life's Pensions newsletter for advisers

Issue 2: Nov 2006

With the changes introduced at A-Day, pension planning is now more flexible – and by using offshore bonds you could increase your client’s saving flexibility further. Offshore bonds can help you make the best use of your clients’ available tax reliefs and allowances both pre and post retirement.

What flexibility can an International Bond offer?

No limit on investment amount
Tax deferred withdrawals of up to 5% per year
Access to money at any time as lump sum or regular withdrawal, without the restrictions faced by pensions, and subject to any illiquidity of the funds invested in
Further investments can be made at any time
Easy to put into trust or transfer ownership
Change funds investing in at any time

	Pension	Offshore Bonds
Fund growth	Virtually tax-free	Virtually tax-free (withholding taxes may apply)
Payments	Normally, tax-relief to £3,600 or 100% of relevant UK earnings (subject to penalty if annual allowance exceeded)	No tax relief
Tax-free lump sum	Normally 25% of fund from age 55 (Age 50 until 6 April 2010)	100% of original investment
Pension Income	All income taxed at marginal rate	Chargeable gains only taxed at marginal rate
Reliefs available	Personal allowances	Personal allowances Top slicing relief Tax-free assignment Time apportionment

So why and when could an offshore bond benefit your client?

Pre-retirement:

Keeping your clients’ options open
If your client is unsure what the future holds for them and they want to retain full access at any time to their money, an offshore bond could fit the bill.

If your client is reluctant to commit to pensions savings an offshore bond is an alternative way to save
As pension funds and offshore bonds do not pay tax on fund growth or income, money grows in a similar way
By saving with an offshore bond your client can retain access and pay into a pension at a later date if needed or use the capital to fund any unexpected costs.

How can an offshore bond fund a pension?
Your client could pay a lump sum into an offshore bond. They could then invest the tax deferred withdrawals of 5% per year into a pension. So rather than investing all their money in pension, they invest in an offshore bond and drip-feed into the pension. Your client will still get tax relief on the drip-feed and retains access to capital.

See the Pre-retirement saving supporting material for further information.

Reaching the pension lifetime allowance
The changes introduced at A-Day allow your client to be more flexible in how they save for the future. This flexibility may be required for more and more clients with the introduction of the pension lifetime allowance.

Is your client over the pension lifetime allowance, already close or at risk of breaching allowance in the long term?

Age of client	Estimated current value of pension fund which will EXCEED lifetime allowance at retirement, based on assumptions below
35	£548,000
40	£733,000
45	£981,000
50	£1,313,000

Assumes lifetime allowance increases at 2.5% pa, fund increases at 6% pa, retirement age of 65 and no further payments. These figures are for illustration and not guaranteed.

If so, then an offshore bond is worth thinking about for your client and can help them avoid an unnecessary tax hit.

Post-retirement:

Minimise the tax your client pays by timing the use of offshore bonds and pensions for tax relief
With an offshore bond your clients’ money can continue to grow in virtually tax-free environment and your client has control over when to cash-in to get best tax treatment.

For example

John retires and wants an income of around £100,000 a year. He has the following assets:
- A pension fund of £1.5m including tax-free lump sum of £375,000
- An offshore bond of £500,000 held for 6 years
- Mutual funds (OEICs and unit trusts) of £300,000 (invested in funds that do not generate income)

John could generate a tax efficient income of around £100,000 a year by timing his withdrawals carefully. Find out how in the Post-retirement income supporting material. These figures are for illustration and not guaranteed.

Investing tax-free cash from a pension
An offshore bond is worth considering in relation to your clients’ pension tax-free cash. After the A-Day changes the options for investing pension tax-free cash has changed – your client could pay this into an offshore bond and continue to get a similar tax environment to a pension.

Your client’s investment in an offshore bond will grow in a virtually tax-free environment and they can control the amount of tax paid when they cash the bond in by considering their tax status at that time.

You can find further information and literature about the International Bond from Standard Life International here.

Tax and legislation are liable to change. This information is based on Standard Life's current understanding of law and HM Revenue & Custom's practice.

Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances.

No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of this content.