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The big squeeze

Pension allowances are being squeezed. This doesn’t just impact the wealthy few; thousands of people could potentially be impacted and will be looking for additional ways to build their retirement nest egg. Offshore bonds can help support a client’s retirement plans in a tax-effective way, and the opportunities are growing.

More people reach the LTA today

More people could reach LTA from good investment growth

Diligent savers could also reach the LTA in the future

The LTA significantly reduced nearly halved from £1.8m in 2010/11 to just £1m in 2016/17, and is now at £1.03m.

According to a Freedom of Information request from HMRC, there was a 40% jump in the number of people reaching the LTA in 2016/17 compared to the previous year.

A pension pot with £700,000 today could reach the LTA in 10 years at 6% net growth

If growth is higher, at 8%, it could reach the LTA in just 7 years*.

A 35 year old earning
over £57,000 p.a. investing 15% into a pension could reach the LTA by age 70*.

Approximately 1.5 million people earn over £57,000 p.a.**

(Assumes contributions increase by inflation and a 35% salary increase every 10 years. LTA increases by inflation and a growth rate of 6%)

*Source: Old Mutual Wealth’s in-house tool (Tool assumes LTA grows by inflation at 2% p.a.)

** Office of National Statistics 2017 data

Reduced taper allowance:

The squeeze isn’t just coming from the reduction of the LTA; it is also coming from the reduced annual allowance for high earners:

Additional solutions required:

In practice, financial advisers will look at a range of product solutions to meet the financial planning needs of their clients. A pension is just one piece of the jigsaw when it comes to saving for retirement, but is often considered the most valuable due to the tax relief given on contributions.

For clients impacted by the squeeze on pensions, alternative product solutions will become even more important, and offshore bonds could help clients in both the accumulation stage and in the decumulation stage once in retirement.

How offshore bonds can help:

Accumulation stage:

  • No limit on the amount that can be paid in – making them a great alternative if the client is impacted by the squeeze on pension allowances but still wants to save for their retirement.
  • Tax-efficient growth – similar to a pension, the money invested will grow virtually tax-free (except for withholding tax).
  • Simplicity – provided the client doesn’t exceed their 5% p.a. withdrawal allowance, the offshore bond does not need to be included on a tax return. This is the same simplicity that pensions and ISAs enjoy.
  • Easy administration – just like a pension, the offshore bond provides the client with access to a range of assets within one easy to administer product wrapper. Some offshore bonds allow access to a broader range of assets and multiple currencies all managed within one convenient wrapper.
  • Controlled investment risk – the investments within the offshore bond can be professionally managed to stay in line with the client’s risk profile.

Decumulation stage:

  • Access to income in a tax-efficient way – with an offshore bond, the client can access 5% of the premium without any immediate liability to tax each policy year. If unused, the 5% annual allowance can accumulate to provide access to a tax-efficient lump sum in retirement.
  • Withdrawals above 5% can still be tax-efficient – unlike a pension; it is only the gain on the amount withdrawn from an offshore bond which is potentially subject to income tax. Clients have control over when they realise any gains, and can use a number of personal allowances to reduce their tax liability. A gain of up to £17,850 in 2018/19 could potentially be tax-free (personal allowance: £11,850, starting rate of 0% on savings income: £5,000, personal savings allowance: £1,000).
  • Option to gift money in a tax-efficient way – if parents/grandparents want to financially help their children/grandchildren, segments can be assigned (once they turn age 18), which can be extremely tax-efficient if the child is not working and is a non-taxpayer (£17,850 of gain is potentially tax-free). Unlike other investment products, money doesn’t need to be encashed before it can be gifted to loved ones.
  • Option to use trust wrappers in the future for inheritance tax planning – a clear advantage of using offshore bonds is the long-term flexibility they provide in enabling money to be placed into trust in the future, which can help provide a simple solution for future inheritance tax concerns. The policyholder decides how many segments to assign into a trust at any one time, and can assign segments in stages, providing flexibility and control.

Clients want simplicity, control, flexibility and tax efficiency when it comes to their long-term savings. No one knows what the future holds, so a solution which adapts as circumstances change will help to ensure the client stays on track.

Investment into Quilter International’s Select Bond starts from just £20,000 and £500 for top-ups, making it an offshore bond that is accessible to more people. The Select Bond has a simple, clear and competitive charging structure, and an efficient online proposition, making it a compelling alternative for those clients who are impacted by the squeeze on pensions.

The value of investments may fall as well as rise and investors may not get back what they put in.

This document is based on Quilter International’s interpretation of the law and HM Revenue and Customs practice as at June 2018.We believe this interpretation is correct, but cannot guarantee it. Tax relief and the tax treatment of investment funds may change.

The value of any tax relief will depend on the investor’s individual circumstances.

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