John Turton, director, Barclays wealth advisoryGame of two halves
Barclays Wealth considers the best options for yielding tax efficient retirement capacityJust a year ago, the market was full of gloom and despondency – pensions were a thing of the past for retirement planning thanks to the government’s restrictive contributions and the prospect of tapered tax relief.
What a difference a year makes.
A new government and a new approach has breathed fresh life back into the product as a £50,000 compromise on contributions was announced, carry forward was reintroduced, the age 75 rule was abolished and 50 per cent income tax relief made available for additional rate taxpayers. £50,000 @ 50 per cent relief… does this suggest the pension is dead? Long live the 50:50 pension.
However, for the very well heeled the prospect of the lifetime allowance being cut back to the original 2006 level of £1.5m from 2012/13 means that pensions simply don’t provide enough tax efficient retirement capacity. So for them, what is the next best alternative?
We’ve done a few calculations to see what the most logical option is. And the numbers are not quite as clear cut as one would hope. In fact, they throw up some oddities where choice and subjectivity are likely to override the maths.
Of course with any comparison we could consider the kitchen sink of possibilities. So, for simplicity, acceptance and access, we deliberately excluded the following:
We then applied the appropriate tax rules and reliefs (investment, accumulation and income) to each product, presumed the client remains an ART for life, uses their CGT annual exempt amount each year outside of this investment and holds the same asset holdings (100 per cent equity) in each alternative.
Mathematically, the best product after a pension is undoubtedly a VCT. This is hardly surprising as it can attract 30 per cent income tax relief, no CGT on accumulated gains and no tax on encashment for income. But, this numeric outcome has flaws: VCTs are more risk orientated than conventional equities, they may pay dividends quite regularly as assets float and do not reinvest, the second-hand market does not trade very close to NAV allowing encashment precisely when needed and buy-backs occur at times appropriate to the trust and assets, not the investor.
Thus, the structure is problematic when being used for a lifetime event.
Second comes the onshore bond. This unusually high position is based upon a number of aspects that onshore bonds are not particularly well known for, driven by the fact that they are subject to UK company investment taxation.This means that capital gains are still subject to indexation relief, UK dividends are exempt from tax, index linked gilts are exempt from tax and charges tend to be modest.
In effect, something like distribution funds only attract tax at source of approximately eight per cent. However, most have a very limited range of investment funds and cannot be encashed without a further liability to chargeable event taxation, unless assignment to lower rate taxpayers or being encashed while residing abroad is used.
The collective carries considerable tax on dividends and yield, but can potentially gain exemption from gains via the CGT annual exempt amount. However, trading between funds is potentially a taxable event and if the HNW client already uses the CGT annual exempt amount within an existing portfolio, tax on exit can be considerable, placing it last in our comparison.
So, the offshore bond tends to be the product of choice, but driven by a combination of defaults, their inherent flexibility, choice and control. Benefits include:
Pensions may not be dead, but for HNW retirement planning, offshore bonds are well and truly alive. n
Full pension comparison calculations available on request. Please contact Barclays Wealth on +44 (0)207 1161000
John Turton is a director at Barclays Wealth Advisory
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