Offshore Bonds for Retirement Planning

Doctors who are at or near the Annual Allowance for pension contributions of £10,000-£40,000 depending on income (with those earning £150k+ having a reduced allowance) and the Lifetime Allowance of £1,030,000 (2018/19) need to be careful when saving for retirement to avoid tax charges on pension contributions and/or their retirement benefits.  Where there is no longer any scope for pension saving, doctors might consider alternative ways to build their retirement nest egg.  This article looks at offshore bonds as one option for planning for retirement in a tax-efficient way.

Advantages of saving in an offshore bond include:

  • There is no limit on the amount that can be paid in 
  • Similar to a pension, the money invested in an offshore bond grows virtually tax-free (except for withholding tax) 
  • While the investments are growing and there are no withdrawals or these are limited to 5% of the original amount invested per annum, the offshore bond does not need to be included on a tax return.  This is the same simplicity that pensions and ISAs enjoy 
  • Within the bond the money can be invested in a range of funds, just like a personal pension

When it is time to take benefits from the bond, helpful features include:

  • Up to 5% of the original investment amount can be withdrawn each year without an immediate tax charge.  This allowance accumulates, so if 5% is not taken one year, up to 10% can be taken the next.  There are two possible uses for this: 
  • Taking an ‘income’ of up to 5% of the original investment a year 
  • Letting the allowance accumulate, so that after 20 years for instance up to 100% of the original investment could be taken as a tax-efficient lump sum

Note withdrawals taken using the 5% allowance are tax-deferred and not tax-free as they will be taken into account when calculating any tax liability on final surrender of the bond (or on death if earlier).  The maximum that can be withdrawn in this way is 100% of the original amount invested.

  • Withdrawals over the 5% allowance are subject to an immediate tax-charge, but can still be tax-efficient as unlike pensions only the gain on the amount withdrawn is potentially subject to income tax, rather than the whole withdrawal.  The timing of withdrawals can be planned to use any unused personal allowances and/or to avoid going over into a higher income tax bracket 
  • If money is needed to help children or grandchildren, perhaps with costs for a wedding or buying a house, this can be gifted tax-efficiently by assigning segments of the bond to the child or grandchild.  When they surrender the bond under their own name, they pay tax on any gains at their own rate.  If they pay tax at a lower rate this can be much more tax-efficient than taking money out of the bond yourself (and paying tax at your rate) before making the gift as cash 
  • If your mind turns instead to passing the money on down the generations tax-efficiently, there is the option to put the bond or segments from it into trust in future

Please note the value of any tax benefits depends on individual circumstances and tax rules and regulations are subject to change by the government.  This article does not constitute financial advice.  For personal financial advice please contact Richard Higgs CFP FPFS on 0117 966 5699 or richard.higgs@wealthwestmedical.co.uk.

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