help me understand the taxation of offshore bonds, please
Discussion
I am wondering what to do with the tax free lump sum portion of my pension. While tempted to do the usual PH thing, i wouldn't have anywhere to put another car and ideally I need it to produce an income. As i understand it, if i invest it in an offshore bond, i can withdraw up to 5% of the capital each year tax free each year. What i don't really understand is what happens after 20 years. Eg i invest 250k in an offshore bond. I draw 5% a year and the bond grows at 4% a year. After 20 years there should be approx £150k left. Do i suddenly get a "income" of £150k in year 21, or can i continue to draw down the bond over time but the drawings are no longer tax free? I am figuring with 12.5k drawdown (5% of the original) and 4% growth it would take approx another 20 years for the fund to be extinguished, by which time i will be dead or gaga?
Will,
First, why an offshore bond?
You could take 2.5% for 40 years, etc. That would mean investing less at outset and keeping more cash on hand, which might give you more flexibility? An offshore bond, as you probably know, allows for better roll up at tax isn't applied as the fund grows. But although it might work well for you, the bond is taxed at your marginal rate when its term is 'up'
Single premiums invested into a bond are excluded as capital sums when it comes to working out care costs which may be useful to you, but assuming you're retired, why not (if you really think a bond is right for you), consider a cheaper onshore bond with half the amount and bleed away the rest. If you don't use the 5% or so that you have attached to the bond, that will accrue - ie; after 4 years of not using your annual amounts, you can take 20% tax free.
Why take all the tax free cash as a lump sum, why not crystalise it on a dripfeed drawdown basis, so that the £250k you are entitled to, and need to derive income from is chipped away slowly and more importantly, as tax free income? That allows you to keep your pension hefty, it allows you to dictate lower fees and you can always take more on an ad hoc basis if you need it.
Most importantly, the cash from your pension is already tax free - why lock it away simply in an attempt to be tax advantageous again, and hasn't it been locked away for long enough?! I don't know your circumstances, I'm sure you've considered all of those things.
First, why an offshore bond?
You could take 2.5% for 40 years, etc. That would mean investing less at outset and keeping more cash on hand, which might give you more flexibility? An offshore bond, as you probably know, allows for better roll up at tax isn't applied as the fund grows. But although it might work well for you, the bond is taxed at your marginal rate when its term is 'up'
Single premiums invested into a bond are excluded as capital sums when it comes to working out care costs which may be useful to you, but assuming you're retired, why not (if you really think a bond is right for you), consider a cheaper onshore bond with half the amount and bleed away the rest. If you don't use the 5% or so that you have attached to the bond, that will accrue - ie; after 4 years of not using your annual amounts, you can take 20% tax free.
Why take all the tax free cash as a lump sum, why not crystalise it on a dripfeed drawdown basis, so that the £250k you are entitled to, and need to derive income from is chipped away slowly and more importantly, as tax free income? That allows you to keep your pension hefty, it allows you to dictate lower fees and you can always take more on an ad hoc basis if you need it.
Most importantly, the cash from your pension is already tax free - why lock it away simply in an attempt to be tax advantageous again, and hasn't it been locked away for long enough?! I don't know your circumstances, I'm sure you've considered all of those things.
Offshore because it offers tax advantages?
IMHO you should decide on which product matches your needs and offers some kind of investor protection first, then look for tax efficiency.
Remember that taxation rules can easily change and tax avoidance seems to be targeted by all political parties.
IMHO you should decide on which product matches your needs and offers some kind of investor protection first, then look for tax efficiency.
Remember that taxation rules can easily change and tax avoidance seems to be targeted by all political parties.
Had these for some 10-12 years. In my honest opinion, if you are asking these questions - DO NOT USE THEM.
The tax impact over your life cycle, and tax regulations life cycle...will make owning them a mightmare for you.
Unless you have 5m+....keep it simple, as all else, will bite you back hard.
And before you ask....no, do not ask an IFA.
Nite
The tax impact over your life cycle, and tax regulations life cycle...will make owning them a mightmare for you.
Unless you have 5m+....keep it simple, as all else, will bite you back hard.
And before you ask....no, do not ask an IFA.
Nite
LeoSayer said:
Offshore because it offers tax advantages?
Leo,I asked because I wondered if all of those advantages were relevant. Taxation isn't always equally as high on everyone's list of priorities.
Big Ant,
Reads like you've had a bit of a horror story. They were widely (and in many instances) badly sold, opaque, expensive and complicated. But in this day and age, invariably (for regulatory and audit purposes if nothing else) they should invariably be considered before being discounted at least and for some clients, if for nothing else as part of a suite of products and approaches, consideration has some merit (at least in principle). They shouldn't be dismissed completely out of hand at first sift.
The one issue that you've touched upon that I do agree with, is accurately predicting legislation and regulation over anything more than 20 years or so. Generally, it's fair to say that anyone under 40 faces an uncertain future. Hey, maybe it's always been like that. But the state seems ever more obsessed with centralised control of private wealth, to the point almost, we're tipping into something resembling default collective ownership of it. And that, by another word is.. (gulp).
big ant said:
Had these for some 10-12 years. In my honest opinion, if you are asking these questions - DO NOT USE THEM.
The tax impact over your life cycle, and tax regulations life cycle...will make owning them a mightmare for you.
Unless you have 5m+....keep it simple, as all else, will bite you back hard.
And before you ask....no, do not ask an IFA.
Nite
The tax impact over your life cycle, and tax regulations life cycle...will make owning them a mightmare for you.
Unless you have 5m+....keep it simple, as all else, will bite you back hard.
And before you ask....no, do not ask an IFA.
Nite
What is the tax advantage?
If the investor is tax resident in the UK, then they are liable to UK tax on their worldwide income, so even if the tax on interest charged in the offshore territory is low or Nil, they will still have to pay UK tax on this income.
If there is a Double Taxation Agreement in place between the UK and the country in which the investment is based, the taxpayer will be given credit for any foreign tax deducted at source.
The same would go for any Capital Gain on the disposal of the investment.
If the investor is tax resident in the UK, then they are liable to UK tax on their worldwide income, so even if the tax on interest charged in the offshore territory is low or Nil, they will still have to pay UK tax on this income.
If there is a Double Taxation Agreement in place between the UK and the country in which the investment is based, the taxpayer will be given credit for any foreign tax deducted at source.
The same would go for any Capital Gain on the disposal of the investment.
The underlying investment grows quicker when offshore, due to more beneficial tax treatment of accruing growth.
If the end game is to have a slug of cash that you might not need to spend but might still have plans for or you might wish to treat in a certain way, then offshore *can* have advantages. But you can run the risk of the tax tail wagging the investment dog and target fixation kicks in.
If you want to have well informed clients, if you want to have happy PI underwriters (especially when dealing with a substantial portfolio), you gotta consider everything nowadays. It can be a circuitous and torturous route at times - you'll know only too well Eric, that no two client files are alike..
If the end game is to have a slug of cash that you might not need to spend but might still have plans for or you might wish to treat in a certain way, then offshore *can* have advantages. But you can run the risk of the tax tail wagging the investment dog and target fixation kicks in.
If you want to have well informed clients, if you want to have happy PI underwriters (especially when dealing with a substantial portfolio), you gotta consider everything nowadays. It can be a circuitous and torturous route at times - you'll know only too well Eric, that no two client files are alike..
Fishtigua said:
Eric Mc said:
And I presume those managing such schemes will expect decent fees for their services.
I sell a lot of yachts from these fees. Thank you all. anonymous said:
[redacted]
The FCA is just warming to that, funnily enough. It has announced what it refers to as a 'thematic review' into due diligence.If you want to do it yourself, the research that is, tread carefully - inadequate research explains why we continue to have so many scandals. To give you a steer, as a pro, I'm allowed to rely on my third party product providers for *factual* information. So if, for example, some fund manager or a shady discretionary manager explains what his or her asset allocation is, their various holdings, their I kid you not, all done and dusted, all out in the open and exposed to sunlight, bottom line blah blah blah cost of ownership then I can accept that. I file it and it forms part of my audit trail.
But it gets tricky when opinion is factored in - if said manager claims he or she has a low risk proposition, then I can't take it at face value. Just as I can't take at face value the claim to a high risk proposition. Nailing that, and articulating a sales (and let's be honest, that's what it is) proposition for my clients and business into something that is verifiable and repeatable demonstrates a professional mindset. IFAs do get a bad press ( I was lied to back in 1987 and bought a couple of endowments) but the vast majority nowadays genuinely have the client at the heart of things.
As has been said they can make sense, a good think for use in next generation tax planning for example, and deferrment of tax can pay dividends in the long run after all onshore tax breaks have been accounted for.
Historically, they were used for too smaller investors and for too short a timescale to take advantage of the benefits they can bring.
Cost wise they are not as expensive as they once were, RDR has had an impact, but given the recent changes to pension legislation, and the up coming ones, why on earth would you take the money out of the pension wrapper, totally tax exempt in all but name, and place it into a tax deferrment vehicle?
A SIPP has, if anything, great investment choice and costs should not be massively out of kilter either.
Historically, they were used for too smaller investors and for too short a timescale to take advantage of the benefits they can bring.
Cost wise they are not as expensive as they once were, RDR has had an impact, but given the recent changes to pension legislation, and the up coming ones, why on earth would you take the money out of the pension wrapper, totally tax exempt in all but name, and place it into a tax deferrment vehicle?
A SIPP has, if anything, great investment choice and costs should not be massively out of kilter either.
Thank you to everyone for their thoughts so far, particularly Ginge R - I can see not taking the tax free lump sum as a lump sum makes perfect sense it had just never occurred to me. I haven't actually decided to retire yet (my wife's reaction was one of horror - "I married you for dinner, not for lunch" but I reckon a new TT bike should solve that as then she will never be home at lunchtime anyway!) not least as I am not yet 55 and so couldn't draw the pension for a while. My pension is currently with the bank I work for although it is a DC scheme so it may be worth moving it. Despite the comments about IFAs it sounds like I should take some advice if I do decide to retire. I don't mind paying for advice, it is platform fees, trail fees etc where I see the limited value.
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