Belfast Telegraph

Sunday 28 December 2014

Assurance for the family's future

I finished last week by promising an answer to the difficulties faced by those earning over £100,000 and the 60% tax rate.

In one sense the problem here is not just about the tax rate, but it is also about the whole question of funding for your future and having access to your funds.

One part of the Finance Act is concerned with limiting the amount that can be put into a pension and the total amount that can be saved.

From 2010 pension allowances will be frozen for five years (until 2015), with the annual allowance remaining at £255,000. There are, needless to say, penalties for getting it wrong. At a time when we might expect the government to help us save for our retirement, they make it more difficult through over-complication.

The first thing to do, although it’s not offshore, is to maximise your ISAs, as any withdrawals from these are tax free. Then, returning to my theme of offshore products, here’s one answer. If you hold assets inside an offshore bond, the rules currently allow you to take 5% of the initial sum invested without an immediate liability to income tax.

So, for example, an asset of £50,000 that produces an income of 5% (or £2,500) will, in my original example of someone earning £100,000, remove part of their allowance. One alternative would be to hold this in a life assurance bond and keep the allowance.

Another means of reducing the effect would be to make a pension contribution before April 5, 2010. Which would be fine if the income isn’t needed. But the benefits in my opinion go further.

If we work on the premise that when you take the benefits from a pension the most important matter is the amount of net income that you will have to spend, then the picture becomes much clearer.

One of the problems with any pension is that you only have access to part of the fund. That it to say, you can get your hands on the tax-free lump sum of 25% but the rest has to buy an income.

This income is taxed and, whilst you may be able to set up a flexible income vehicle, for most of us the problem is getting enough out of the pot to carry on living at the standard to which we have become accustomed.

The final insult is that, when you do eventually die, the pension pot you have struggled to earn vanishes in a puff of tax smoke.

So, returning again to the Offshore Bond scenario, why not start putting money into a life assurance bond in the secure knowledge that, on death, it can be passed on to your children — if you have not spent it all?

There are a couple of other advantages. You can put a life assurance bond in Trust, you can assign it to other members of the family and you can have joint ownership.

What if you like the idea but do not have large lump sums available and can only afford a monthly amount? Well, there are offshore savings plans, which are effectively a series of life assurance bonds, and have the same advantages as a lump sum bond.

The Offshore Bond has one final benefit. Imagine you are in your forties, have saved into a personal pension plan and suddenly become unable to work.

Current rules do not allow you to take you pension until age 55. But if you had used the Offshore Bond route outlined above, you would be able to access your money at any time.

In the end though, it’s all about balance. There is nothing wrong with pensions “per se” — but they do have limitations. So, each of us must just sit down and work out what best suits our own, individual circumstances.

Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services which is regulated by the Financial Services Authority. To contact him, use the website www.realwealthmanagers.co.uk

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