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Retirement Planning and Retirement Income Options

1 Oct

This article focuses on Money Purchase Schemes – so, schemes where you save up a fund to buy your retirement income e.g. Personal Pensions, SIPPs, SSASs, Stakeholder Pensions, Defined Contribution Workplace Schemes

Key Points

  • You do not have to accept the pension income offered by your pension scheme. You have the right to take your retirement income from a different provider – this is called the open-market option (OMO).
  • Your scheme may not offer the best deal for your money when you retire, so check whether you can get more for your money by using the open-market option.
  • In difficult economic times, your pension fund may be worth less than you expected, so getting the best deal is even more important.
  • Choosing how to take your retirement income can be a complicated decision. I always recommend that you take professional advice from a suitably qualified Independent Financial Adviser authorised by the Financial Services Authority (FSA).

Making your retirement choices and always think before you choose 

Things you should know :-

  • Your pension scheme should send you, no later than 6 months before you are due to retire, details of the choices you have.
  • This information will discuss buying an annuity (an arrangement which provides you with a pension income for the rest of your life).
  • Your pension scheme must tell you that you have the right to shop around and about the different types of annuity that are available.
  • You do not have to accept the annuity quoted by your pension scheme and you can shop around to find the best deal – this is called the open-market option.

Your income in retirement will depend on 4 main things:

  • how much money you and your employer have paid into your scheme;
  • how this money has been invested;
  • how much of this money has been used to pay any charges; and
  • the decision you make now on how you take your retirement income.

If your pension fund rises and drops in value (for example, all or some of it is linked to stocks and shares), you may want to consider switching your fund into a lower risk investment to reduce uncertainty in the run up to retirement. Check with your scheme whether this option is available and whether there is a charge for switching your money.

Making your retirement choices
You may get better value for your money if you shop around using your open-market option.

Before you make any decision, you need to consider:-

  • your overall financial situation;
  • what you might need financially in the future; and
  • how much tax-free cash you want to take (i.e. a pension commencement lump sum).

There are limits on the amount of cash you can have as a lump sum – typically, up to 25% of your fund. The cash you take will affect how much money is left over to buy your pension income.

I would recommend that you take qualified financial advice

What is an annuity?
An annuity converts your pension savings into a series of payments – the pension scheme pays your pension savings to an insurance company who, in return, agrees to pay you a regular income for the rest of your life. This is often called a lifetime annuity.

What affects the cost of an annuity?

  • Type of annuity
  • Age – annuity rates tend to get higher the older you are
  • Sex – annuities for women currently cost more. This is due to a change which will apply from December 2012.
  • Health and lifestyle
  • Prices vary from provider to provider just like any other goods or services you buy, which is why it is so important to consider shopping around.

How does the open-market option work?

You have a choice of who provides your retirement income when you retire. Your pension scheme will normally offer you an annuity but you can also shop around so you can choose the annuity that best suits your needs. Shopping around using your open-market option helps you to:

  • find out how the cost might vary between providers;
  • identify different features which may help you find the annuity which best suits your circumstances and how these features can affect the cost of the annuity or how much pension you get; and
  • decide if you want to choose another option instead of buying an annuity if your scheme allows this.
  • to find out if the annuity offered by your scheme is competitive;
  • if you are in poor health as this may mean you can get a higher annuity; and
  • if your lifestyle may qualify you for a higher annuity, for example, if you smoke or do a particular type of job.

Even if you have been very happy with your pension scheme up to now, consider the open-market option to check that it is offering the best deal for you when you come to retire.

What types of annuity are there?
There are 2 basic types of annuity – a single-life annuity and a joint-life annuity. There are other features that you could choose to include in the basic types, to suit your needs and circumstances. Check which features are included in the annuity offered by your scheme.

Single life – This pays an income to you for the rest of your life.
Joint life – This pays an income to you for the rest of your life. And then, when you die, it continues to be paid (possibly at a reduced rate) to your spouse or partner until they die.

Options you may be able to include:

Level – the pension income you receive stays the same throughout your life.

Yearly increases (escalation) – the pension income you receive increases each year, in line with inflation (the Retail Prices Index (RPI) or the Consumer Prices Index (CPI)), or at a fixed rate, for example, 3% or 5% each year.

Guarantee period – your pension income can be guaranteed for a set period, usually 5 or 10 years, so that it continues to be paid (usually to your widow, widower, civil partner, or to your estate) for the rest of the guarantee period if you die before the period ends. If you include a guarantee period, it may involve a small reduction in the amount of your annuity.

Lump sum on death – if you die, the annuity will pay out a taxable lump sum, equal to the cost of your annuity less any income you have already been paid.

Investment-linked annuities (including with-profit annuities) – these annuities offer the potential for you to receive a higher income but rely on stock-market performance. As a result, your income could go down as well as up.

Impaired life annuities – these annuities can pay a significantly higher income if you have a health problem that threatens to shorten your life. In cases of serious ill-health, where a registered medical practitioner confirms that your life expectancy is less than a year, the law may allow you to take the whole of your pension fund as a lump sum.

Enhanced life annuities – these annuities can pay a significantly higher income if your lifestyle may shorten your life.

What alternatives are there to an annuity?
When you retire, you may decide you do not want to buy an annuity.

Some of the alternatives we describe below may only be suitable if you have a large amount in pension savings or other sources of income and are comfortable taking some risk with your pension. Not every pension scheme offers all or any of these alternatives.

Again, before making a decision you should take qualified financial advice.

Make sure you are comfortable with the risks of choosing one of the alternatives to an annuity.

Cash lump sum – for smaller funds (this is sometimes called trivial commutation). 
If you are at least 60, you may be able to take all your pension savings as a lump sum. You can usually only do this if the total value of all your savings in all pension schemes is less than £18,000. If your fund value in an occupational fund is less than £2,000 then you can take it as a cash lump sum if your scheme rules allow, even if all your pension savings are more than the minimum amount of £18,000.

You usually pay tax on part of these lump sums.

Phased retirement – you can use your pension savings to buy annuities at different ages in the future.

Drawdown pension (sometimes also called income withdrawal or drawdown) – you take an income directly from your pension fund.

Short-term annuities – you can buy a series of annuities each lasting for a fixed term (usually up to 5 years). You can then leave the rest of your savings invested or use them to buy a lifetime annuity.

Putting off buying an annuity
Your scheme rules may allow you to put off (postpone) buying an annuity, whether or not you stop working. By postponing buying an annuity (either for a limited time or indefinitely), you may get a higher annuity because your pension savings will have been invested for longer and you will be older. However, annuity rates and investments can go down as well as up. Check whether you may lose any guarantees or have to pay any charges by putting off taking your pension income. It may also be possible for you to be paid your tax-free lump sum but delay taking any income.

Other ways
There are new options now available which pay a regular income and offer protection and/or guarantees of either investment growth or the amount of pension fund you will have left to buy an annuity later on. They vary in:

  • what they’re called;
  • the guarantee/protection they offer; and
  • the charges they make to cover the cost of the guarantee/protection.

You generally have to give up some investment growth potential to pay for the guarantee/protection.

What things should I keep in mind if I shop around?

  • If you use your open-market option and decide to buy your annuity from another insurance company, your pension scheme might take charges from your fund. You need to get an estimate of the value of your fund (less any charges) before you can ask insurance companies for a quote for an annuity.
  • Make sure you compare like with like. For example, don’t compare a level annuity with one that increases.
  • Make sure any annuity you choose fits with your circumstances. (For example, do you need an escalating annuity or do you qualify for an enhanced annuity?)
  • Check whether you will lose any benefits (for example, the option to buy an annuity at a guaranteed rate) or pay any charges if you don’t take up your pension scheme’s offer.
  • Quotes for annuity rates are often available only for a limited time, usually seven to 28 days. Also find out if there is a ‘cooling-off’ period during which time you can cancel any choice you make.
  • You may find it difficult to shop around if you have a small pension fund (less than £30,000) as some firms will not provide an annuity.
  • Not all companies will deal with you direct and only offer products through financial advisers.
  • If you use the open-market option, the adviser can be remunerated through a commission paid by the insurance company (you may prefer to pay via an agreed fee amount).

If you are comparing annuities under the open-market option, remember to compare like with like.

Frequently asked questions
What if I have a defined contribution fund in more than one pension scheme?
You may want to get financial advice. For example, you may be able to combine the money from all your schemes and use it to buy one annuity rather than buy a different annuity for each scheme. This may give you better buying power.

Do I have to pay tax on my pension income?
Yes, your pension income counts as earned income for tax purposes. Remember that most schemes will allow you to take a part of your fund, normally up to 25%, as a tax-free lump sum, as well as receiving an income.

What if I am contracted out of the additional State Pension (the State Second Pension)?
Your employer’s money purchase scheme will be able to tell you if it is contracted out of the State Second Pension (S2P). (This used to be called the State Earnings Related Pension Scheme (SERPS).) If so, you must currently use part of your pension fund to buy a ‘protected rights annuity’.

How will I know how much I have available to buy an annuity?
You can get an estimate of the value of your pension fund (less any charges for using the open-market option) from your pension scheme. Your pension scheme should send this to you before your retirement date, so you can start to shop around. You should then take off any amount you plan to take as a tax-free lump sum when you retire.

Will the stock market affect the value of my pension fund?
If you are invested in a fund which rises and falls in value (for example, it is invested in the stock market), the value can change. You may want to investigate whether you have the option to switch into a lower risk fund to reduce uncertainty in the run-up to retirement.

Who regulates annuities?
The Pensions Regulator, regulate workplace pension schemes. However, you will usually buy your annuity from an insurance company and these are regulated by the Financial Services Authority (FSA).

If an insurance company cannot pay all amounts due, the Financial Services Compensation Scheme (FSCS) may be able to help you.

Important Points to Consider

  • Once you have bought an annuity, you cannot normally change your mind. So, it’s worth making sure you get the right one.
  • In difficult economic times, your pension fund may be worth less than you expected.
  • Take qualified advice as the implications can last a lifetime.
  • If you want to delay taking your pension income, check for charges or penalties which might apply.
  • Do you want to change funds before you retire?
  • Do you want to take tax-free cash from your fund before you take an income? (Remember the Pension Commencement Lump Sum is only available at the date you take pension benefits and not afterwards – “a use it or lose it” benefit)
  • What annuity options are available from your scheme?
  • Compare what your scheme offers with the open-market option.
  • Do you qualify for an impaired life or enhanced annuity?
  • Would one of the alternatives to an annuity be suitable for you?

Where to get more information
You can get more information from the following organisations.

The Money Advice Service – also produce a range of free guides, available from its website.
Helpline: 0300 500 5000
Typetalk line: 18001 0300 500 5000
Website: http://www.moneyadviceservice.org.uk

Department for Work and Pensions (DWP)
Phone: 0845 606 0265
Textphone: 0800 731 7339
Website: http://www.direct.gov.uk

Financial Services Compensation Scheme (FSCS)
The FSCS helps protect consumers against financial loss when firms authorised by the FSA cannot or are unlikely to pay claims against them.
Phone: 0207 741 4100 or 0800 678 1100
Website: http://www.fscs.org.uk

The Pensions Advisory Service (TPAS)
TPAS is an independent organisation which can help with questions about your pension and annuities. You should also consider using the annuity planner on the TPAS website homepage.
Phone: 0845 601 2923
Email: enquiries@pensionsadvisoryservice.org.uk
Website: http://www.pensionsadvisoryservice.org.uk

The Pension Tracing Service
The Pension Tracing Service can help you track down pension schemes you have been a member of in the past. Their tracing service is free – you can either phone them and ask them for a tracing request form or you can use their online form.
Phone: 0845 600 2537
Textphone: 0845 300 0169
Website: http://www.direct.gov.uk

Your trustees or your scheme administrator
You’ll find their contact details in your scheme literature.

A suitably qualified independent financial adviser

So What is Secured Income?

This is the traditional route of Pension Annuities – there are more options available from permanent and temporary annuities but this is fund and age dependent.

HMRC Crack Down on Tax Avoidance Schemes

22 Aug

HMRC has won, subject to appeal three court decisions against tax avoidance schemes. These cases are expected to provide the Exchequer with £200 Million.

The message is clear – when planning to minimise tax, ensure you use the rules that exist, take advantage of government backed schemes (eg personal pensions, ISAs, VCTs, EISs, AGR & BPR related schemes) and use accepted approaches within the flavour of the law – take professional advice. The cases in question are high value high – profile and are out of the remit of the general investor but the ethos of HMRC is clear.

HMRC Letter 480

HMRC have stated that this sends “a very clear message” that it will tackle efforts to avoid paying tax.

The first case, against ‘Schofield’ and heard in the Court of Appeal on 11 July, involved a business owner using a tax avoidance scheme to create an artificial loss on his sold business, even though it had actually made him a £10m profit. HMRC said he paid £200,000 to be involved in the scheme.

Another case against Sloane Robinson Investment Services, heard in the First Tier Tribunal on 16 July, saw the company’s directors attempt to avoid a combined £13m worth of tax on their bonuses. The First Tier Tribunal ruled the scheme, even once it had been modified to counter recently introduced anti-tax avoidance legislation, did not work.

In the final case, against ‘Barnes’ in the Upper Tribunal on 30 July, a scheme aimed at exploiting a mismatch between two tax regimes on behalf of more than 100 individuals failed to work. HMRC said some £100m was at stake as a result of this scheme.

HMRC director general of business tax, Jim Harra, said: “These wins in the courts are a victory for the vast majority of taxpayers who do not try to dodge their taxes. They send a clear message to tax avoiders – HMRC will challenge tax avoidance relentlessly and we will beat you.

“We have now had three major court successes in avoidance cases in the last month alone and I hope this sends a very clear message: These schemes don’t come cheap, you carry a serious risk that you’ll end up paying the tax and interest on top of a set-up charge which can run into the hundreds of thousands of pounds.

“These were complex cases which show HMRC’s experts doing what they do best, delivering great results for the UK.”

Pension Pots Crippled by Falling Gilt Yields ?

25 Jul
 
It seems that on a regular basis there are articles and information provided suggesting how awful our pension income system is – I am an investment IFA specialising in tax planning. My opinion is different.
 
 private pension scheme cartoons, private pension scheme cartoon, private pension scheme picture, private pension scheme pictures, private pension scheme image, private pension scheme images, private pension scheme illustration, private pension scheme illustrations
 
My opinion – changes in legislation and regulations have made the arrange more flexible. (This is to an extent never seen before). Yes, Gilt Yields are low and this is a major factor in determining annuity rates and yes, compared to the past the returns achieved are low – but so are the factors creating the environment for higher rates.
 
A key factor is inflation – we recently saw rates hit 3.6% only a few months ago but they have fallen back in more recent times. On a historical basis these rates are very low. Annuity rates were much higher, at a time when inflation was also much higher. So we have been a victim of the success of monetary policy controlling the rate of inflation. The figures around annuities and inflation have moved maybe no quite in tandem but there has been a very strong correlation.
 
There again part of what determines the value of Gilts is inflation, especially level Gilts where inflation (and future expected inflation) is clearly an important factor affecting the pricing i.e. if everything is going up in price and the rate of this increase both known and expected has an effect on the value of assets with known returns.
 
So let’s have a look at the actuals:-
 
Gender Age Escalation Guarantee Purchase Price Expected Annual Payment
Male 55 Level None £100,000 £4,750
Male 60 Level None £100,000 £5,250
Male 65 Level None £100,000 £5,950
Male 70 Level None £100,000 £6,700
Male 75 Level None £100,000 £7,900
Gender Age Escalation Guarantee Purchase Price Expected Annual Payment
Female 55 Level None £100,000 £4,650
Female 60 Level None £100,000 £5,050
Female 65 Level None £100,000 £5,700
Female 70 Level None £100,000 £6,300
Female 75 Level None £100,000 £7,350
 
The above figures were provided through find.co.uk and have been rounded down to provide a guide estimated price rather than actual terms. The basis was a simple level lifetime annuity with no additional benefits.
 

So the question is – in an environment where interest rates offered, say a 5 year fixed rate bond typically pays arround 4.0% AER and the rate of inflation for June 2012, according to the Office of National Statistics, was 2.4% (Consumer Price Index) or 2.8% (Retail Price Index). Are these rates so unrealistic?

For investments, where I advise – my opinion for the future – if I could consistently achieve net returns of 5% per annum plus a bit to neutralise inflation – I would feel job well done.

The concern with pensions are twofold – rates available once at retirement but also the returns achieved during the term getting to your retirement date.

So the investment environment and your success is paramount – effective management is essential and this is where my expertise can help. The current speculation about the Eurozone, amongst other international and national issues, and focus on Spain will have an effect. If you think, circa £29 Billion was wiped off the value of the FTSE 100 yesterday – while Spanish government borrowing costs soared to a new euro-era high of 7.5%. 

As a result, gilt yields have approached all-time lows. This could be disastrous for many pension pots as the vast majority of all pensions and savings are linked, at least in part, to shares. The crisis in Europe is and has driven many investors into gilts (seen as a “safe haven”. The downside effect is this has pushed up the price of gilts, so reducing their effective yield and forcing annuity providers to cut rates to historic lows.
 
This means those on the cusp of retirement are destined to have a permanently lower level of retirement income. Remember, there are choices as to how to draw your retirement income and some of those facilities are flexible and can change. For example there are temporary annuities, income drawdown, and some halfway products available. With pension planning and retirement income – every situation is unique, so I can only comment on options available on a case by case scenario.
 
Issues to be aware of – personally I am uncomfortable as a general with the following – buying an annuity when you do not have a need for the income (I have heard of sales people presenting that you might as well take it – income you could have and why not….beware of sales approaches); moving pensions offshore to circumvent UK legislation (tax planning is all about using the rules as they exist any time you try something else, you run the risk of future legislative changes and the wrath of HMRC).

Don’t Get Caught Out By The Taxation Of Investment Bonds

21 Jul

Earlier this week I met a new client, who is in an awful tax scenario because of how he drew money from two investment bonds – realistically tax should not have been an issue. The problem was caused by their previous financial adviser not understanding the tax rules and making a dire mistake.

I thought I would write an article on this as it is so common for people to suffer a tax bill when no tax could have been payable – the failing being how the bond is taxed and not drawing the proceeds in the most tax efficient manner.

Remember with an investment bond, the policy is made up of mini-policies so you potentially have more flexibility of how you encash.

There are two sets of rules for tax depending on how you withdraw money –  

1. Top Slicing – this is where you draw a proportion of the whole bond equally across all of the mini-policies. The advantage of this is if you draw up to 5% of the original investment, then this is treated as a repayment of capital until such time as you have withdrawn all of your original capital and thereafter assessed to income tax at your marginal rate of tax.

What this means is if you stay within the 5% Rule – you could defer any payment of income tax until another day many years away.

The problem comes if you draw more than this 5%, then the addition is added onto your income to assess the tax liability.  So typically, not the best way to withdraw large amounts of capital from then investment bond.

 

2. Encash whole mini-policies – tax is assessed and payable based on the profit made on each mini-policy.

 

Scenario 1

Client invests £50,000 in an onshore bond and £50,000 in an offshore bond, both invested just under 5 years ago and he has seen a slight drop in value through the investment to £49,000 for each bond.

Client now draws £90,000 – £45,000 from each bond by an equal apportionment across the policies (Top Slicing)

Problem being anything over the 5% Rule, when encashed in this way will be assessed and taxed as income.

Okay, lets say he has an average income of £25,000 per annum

5% Rule for each complete year – 20% of the original – £10,000 on each bond

Onshore and Offshore bonds – to be assessed against income leading to a further expected tax liability of £19,126

 

Scenario 2

Exactly the same as scenario 1 except – now draws £90,000 – £45,000 from each bond by an cashing individual mini-policies

The good news – each investment bond has seen a slight decline in value. Tax is only payable on profits.

Onshore and Offshore bonds – to be assessed against income leading to a further expected tax liability of £Nil 

 

Summary

The point being – if you are withdrawing a fixed regular amount of say up to 5% per annum of the original investment – then Top Slicing can be an effective tool.

If, however you are withdrawing a capital amount there are typically better approaches.

Please be aware that this only touches on the taxation of investment bonds – this is actually a very complicated area but the basics are clear and sound.

CARE NEEDS TO BE TAKEN AND KNOWLEDGE APPLYED

Investment Tax Wrapper – Investment Bonds v Collective Investments

20 Jul

I always find the argument around the suitability of the investment wrapper paramount. Too often I see new clients – who maybe non-tax payers with an investment bond wrapper rather than collective. If this is personally owned I struggle with why someone has chosen to pay Basic Rate Tax when they most likely could have paid no personal tax – admittedly the tax is paid within the fund but all costs will affect investment performance.

OK lets start by getting a bit of jargon out of the way…when I use the global term Collectives, I am referring to anything along the lines of OEICs, Unit Trusts, Investment Trusts, SIVACs, UCITS I, II, III, etc. I am just trying to use an all-inclusive term.

Choosing the most appropriate investment for an individual will depend upon many factors including :-

  • personal circumstances
  • investment objectives
  • current and future levels of income

What factors to consider?

The summary below compares bonds and collectives from the perspective of taking an income, capital growth and various tax and estate planning options.  Whilst the choice of investment should not be made for taxation reasons alone it will be a critical factor.  Other key factors will include product pricing, charges, investment structure, administration and service, fund choice, asset classes, death benefits and trust options.

Investment Bonds

Collectives

Taking an income Taking an income
5% withdrawals can be taken per annum without incurring an immediate tax charge (deferred but not free of tax) and any unused allowance can be carried forward to future years. • Bonds are a useful way of providing an ‘income’ without any impact on an investor’s personal allowance and/or age allowance, (within the 5% allowance).• If withdrawals exceed the 5% allowance (or higher cumulated amount), tax may be payable depending on the tax position of the investor and whether the bond is either onshore or offshore • Because investment bonds are non-income producing assets there is no need for annual tax returns, unless there has been a chargeable event (such as exceeding the 5% annual allowance) resulting in a chargeable gain (realised profit).                             • The income from a collective will be taxable whether taken or reinvested. Non-Equity funds (which hold greater than 60% in cash or fixed interest) have income paid as an interest distribution net of 20% tax (and non-taxpayers can reclaim). Equity funds (which hold less than 60% in cash or fixed interest) have income paid as dividend income with a 10% non-reclaimable tax credit. • Income paid (or reinvested) from a collective will be included in the assessment of an investor’s personal taxation and/or age allowance – although if the collective is held under an ISA wrapper this problem is solved.• Disposal of shares/units to supplement income is a disposal for capital gains tax, although this may be covered by your annual capital Gains Tax Allowance (currently £10,600 in Tax Year 2012/2013). The rate of CGT payable will depend on the allowances and reliefs available to the investor and on their income tax position.• Because collectives produce income they will normally need to be reported each year to HMRC, even if accumulation units or shares are chosen. Capital gains may also need to be reported when a disposal takes place but only if tax is expected to be payable.
Capital growth Capital growth
• When the bond is surrendered (this is a chargeable event) tax is assessed and may be payable depending on the personal income tax position of the bond owner. This is true whether the bond is either onshore or offshore.• Switching funds in an investment bond can take place with no tax implications for the investor. (This is not a disposal for tax purposes while the funds remain under the bond wrapper.)                                              • When shares/units are cashed in, this is a disposal for capital gains tax although this may be covered by your personal Capital Gains Tax (CGT) Allowance. • Losses on disposals can be offset against other capital gains – so can create effective tax planning scenarios.• Taper Relief and Indexation Allowance are no longer available on personal scenarios.• Switching funds within a collective is a disposal for CGT with possible tax and reporting requirements.
   
Tax & Estate Planning Tax & Estate Planning
• Individuals may be able to alter their level of income to reduce or avoid tax on surrender of the bond.Examples – those who have pension income in drawdown can reduce their income received to minimise tax payable; or could use part of the proceeds to help fund a pension, EIS, VCT, etc. so that the tax credit created offsets the tax bill associated with the investment bond encashment. • Gifting the bond (by assigning it nit not for “monies worth”) to a lower or non tax-payer. So an assignment to a spouse or child in further education may not create any liability (depending their personal tax rate) to CGT or income tax. It could reduce or avoid the tax that would otherwise have to be payable by the investor. • Individuals may be able to make a pension contribution to reduce or avoid any further liability to income tax on the surrender of their investment bond.• Gifting the bond to another (i.e. assigning into trust or to an individual) will be a transfer of value for Inheritance Tax and depending the terms of the trust may be covered by an exemption – more commonly though will be treated as a chargeable lifetime transfer.

• Having multiple lives assured can avoid any chargeable event upon death of the bond owner. This is assuming the contract is for encashment on the death of the last life assured. 

• If a chargeable gain arises in a tax year in which the investor is non-UK resident then there will be no further liability to UK income tax.  There may be a tax liability in their country of residence.

• A special relief applies to offshore bonds that reduces the tax liability on chargeable gains for individuals who have been non-UK resident for any period of their investment – Time Apportionment Relief.

• Investment Bonds, depending on the interpretation by local authority, may not be included within the means test for local authority residential care funding – care is needed as this varies from authority to authority, year-to-year, the circumstances surrounding and prior to the investment and many other factors.

• Individuals may be able to alter their level of income to reduce the tax rate payable on a capital gain e.g. those who have pension income in drawdown may be able to reduce it, by careful selection of funds within the collective to select the desires level of taxable income.• Transferring the collective to another individual or into trust will be a disposal for CGT purposes although this may be covered by your Personal Annual Allowance to CGT, or an exempt transfer between spouses. If into trust, gift holdover relief may also be available depending on the type of trust.• Individuals may be able to make a pension contribution which in turn could reduce the rate at which they pay CGT.• Transferring the collective to another individual or into trust will be a transfer of value for Inheritance Tax purposes, although this may be covered by an exemption.• No CGT is payable on death.

• Investors who are both non UK resident and ordinarily resident will not be liable to UK CGT on disposal of their collective.  However, anti-avoidance legislation means they will need to remain non UK resident and ordinarily resident for five complete tax years for the gain to remain exempt from CGT.

•  Collectives are included within individual’s assessment for local authority residential care funding.

Taxation of Fund  Taxation of Fund
Onshore Bond funds’ internal taxation is extremely complex. In general terms it can be summarised as follows:• Interest and rental income are subject to corporation tax at 20%. Dividends are received with a 10% tax credit which satisfies the fund manager’s liability.• Corporation tax is payable on capital gains at 20%. Indexation allowance is available to reduce the gain.• Investors are given a non-reclaimable 20% tax credit to reflect the fund’s taxation.Offshore Bond funds are typically located in jurisdictions which impose no tax upon investment funds, such as Dublin, the Channel Islands and the Isle of Man. And so:

• Interest, dividends and rental income are tax-free while under the bond wrapper. Some non-reclaimable withholding tax may apply to certain overseas income.

• No corporation tax is payable on capital gains.

• Personal tax position, rates and residence status must be considered carefully as taxation is typically payable at your highest marginal rate when the bond is finally encashed.

Collectives are only subject to tax within the fund on income received, and so:• Interest and rental income are subject to corporation tax at 20%. Dividends are received with a 10% tax credit which satisfies the fund manager’s liability.• No corporation tax is payable on capital gains within the fund.

 

Summary

There is no black and white answer on this – it is all circumstance specific but an understanding of the differences is essential. My belief is only pay tax when required and lawful – so products with an inbuilt taxation are to be used only when necessary, the lesser tax rate or for a specific reason/purpose.

Investors make money through investments with three key principles – fair costs, minimise taxation and investment performance.

Now That’s What It’s About!!! – Article Removed

14 Jun

THIS ARTICLE HAS BEEN REMOVED

I have had a discussion with my wife who took the article totally a different way than I had meant and I worry others would do likewise.

I am not someone who brags or talks about the great I am.

My mantra is to understate as the only thing that matters are the people – my family, my friends and my clients.

So to anyone who read the original article – all I was trying to say was how proud I felt that through my endeavours my clients have been able to live the life they deserve.

Please forgive me if it came across as arrogant or bragging – that was the last thing it was meant to be.

Pros and Cons of Offshore/International Bonds

16 May
Most reasons to consider offshore/international bonds include:-
  • Simplicity
  • Price
  • Access
  • Risk profile
  • Fund choice
  • Currency
  • Future aspirations and objectives
  • Tax

The actual reasons are specific to the client/investor and care is needed as there are many alternative investment structures, which maybe more beneficial and suitable.

Taxation of the offshore bond

Single premium investment bonds are taxed under the chargeable event legislation, which means gains are assessed to income tax, rather than capital gains tax (CGT).

As the bond is invested with an offshore insurer it does not suffer any income tax or CGT within the fund except for any unreclaimable withholding tax which may have been applied.

Any gains, dividends, rent or interest are taxed at 0% within the fund.

Taxation of the bondholder

For individuals any chargeable event gains will be chargeable to tax at their appropriate rate (typically, your highest marginal rate including the gain created by the encashment :- 10%, 20%, 40% or 50%.* Trustees will pay tax at 50%.

Taxpayers can use their personal allowance and their highest marginal rate of between 10% and 50% tax bands when calculating overall tax liability. For trustees, the first £1,000 worth of chargeable event gains (assuming no other income) is taxed at 20%.

For highly personalised bonds it’s important to remember that for UK resident policyholders there is a deemed charge of 15% of the premium and the cumulative gains per annum.

Advantages of the offshore bond wrapper

  • Bonds are non-income producing assets so there are no annual tax returns for individuals or trustees (also true of onshore bonds where charges are typically lower).
  • Funds can be switched within the bond without giving rise to a CGT or income tax liability on the investor and with no tax reporting requirements (also true of onshore bonds where charges are typically lower).
  • Switches in and out of funds are not subject to the CGT 30 day rule so will not give rise to a taxable event (also true of onshore bonds where charges are typically lower).
  • Income received gross within the bond wrapper will only suffer income tax on future disposal (basic rate tax is deemed and payable under an onshore bond wrapper).
  • Tax liability is reduced proportionally for time spent as non-UK resident (this excludes normal holidays and is applicable to typically time living abroad).
  • The bond can be assigned by way of gift without giving rise to an income tax charge, although there might be inheritance tax (IHT) considerations (also true of on-shore bonds where charges are typically lower).
  • 5% tax deferred allowances on each premium paid can be taken each year for 20 years without incurring an immediate tax liability (also true of on-shore bonds where charges are typically lower).
  • For the purposes of age allowance, withdrawals within the 5% tax deferred allowance are not treated as income (also true of on-shore bonds where charges are typically lower).
  • Realised chargeable gains may benefit from slice relief which can reduce or remove any higher rate liability (also true of on-shore bonds where charges are typically lower).
  • Top-ups will benefit from top-slicing from inception (individuals only) – (also true of on-shore bonds where charges are typically lower).
  • Multiple lives assured on a whole of life contract can be used at outset to avoid a chargeable event on death of the policyholder, or where there is more than one policyholder, on the death of the last of them to die (also true of on-shore bonds where charges are typically lower). Alternatively, a redemption contract where no lives assured are required can be used (typically not available with an onshore bond).
  • Can be gifted into trust and assigned out of trust without giving rise to an income tax or CGT charge (also true of on-shore bonds where charges are typically lower).
  • Single premium investment bonds are not normally included where means testing is applied by a local authority for residential care (also true of on-shore bonds where charges are typically lower) but care is needed and further advice before assuming to be true.
  • Wide investment parameters (also true of on-shore bonds where charges are typically lower).
  • Ability to appoint third-party custodians and discretionary managers (also true of some onshore bonds where charges are typically lower).

Disadvantages of the offshore bond wrapper

  • On encashment, chargeable event gains can suffer tax up to 50%*.
  • As withdrawals from a bond are assessable to income tax, it’s not possible to use personal or trustee Capital Gains Tax (CGT) allowance to reduce gains.
  • Base cost of the investment is not devalued on death for income tax purposes (chargeable event gains are assessable against original investment and any subsequent additional premium paid).
  • Death of last of the lives assured on whole of life contracts will create a chargeable event (even if bondholders are still alive).
  • Chargeable event gains reduce any available age allowance based on the total gain, not sliced gain applicable where total income exceeds £22,900.
  • May not be suitable where ‘income’ interest exists inside a trust.
  • Investment losses cannot be offset elsewhere.
  • On death of the last of the lives assured, income tax and IHT may be due.

* Finance Act 2009 increased this to 50% for trusts and for individuals with income in excess of £150,000 from April 2010.

 
This article is based on interpretation of the law and HM Revenue & Customs practice as at July 2010. I believe this interpretation is correct, but cannot guarantee it. Tax relief and tax treatment of investment funds may change in the future.

This article provides a high level summary of the potential advantages and disadvantages of offshore bonds held by a UK-resident investor (excluding companies). I cannot accept any responsibility for action taken based on this or related articles, as this is solely for information purposes and is not advice nor recommendation.

My contact details are :- tel 029 2020 1241, email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan