Early Retirees Briefcase
Early Retirees Briefcase
The challenge
- To provide a source of income to bridge between early retirement and Normal Retirement Date
- To minimise any tax liability
- To maximise investment choice and potential
- To ensure flexible access
The offshore bond solution
- Client is aged 55 and plans to retire at 60
- Client invests £200,000 in Portfolio Account; left to grow for 5 years
- Bond now worth £255,257 (5% p.a. net growth)
- Cashes in 2 segments (out of 20) - worth £25,526
- Chargeable gain is £5,526 - within personal allowance
- Continues to cash in 2 segments a year in years 6 to 9:
| Year | Value cashed in | Chargeable gain | Tax Allowance1 | Tax due | Tax as % of gain |
| 5 | £25,526 | £5,526 | £8,413 | £0 | 0% |
| 6 | £26,802 | £6,802 | £8,666 | £0 | 0% |
| 7 | £28,142 | £8,142 | £8,926 | £0 | 0% |
| 8 | £29,549 | £9,549 | £9,193 | £71 | 0.75% |
| 9 | £31,207 | £11,027 | £9,469 | £311 | 2.82% |
| Total | £141,045 | £41,045 | £382 | 0.93% | |
1 Based on 2011/2012 personal allowance growing at 3% p.a. |
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- At age 65 starts to draw pension
- Bond worth £155,133 - left to grow; could be used to supplement pension in later years
What are the advantages?
- Open architecture - huge fund choice
- Preferential terms and annual management charge rebates on majority of funds
- No tax (except withholding tax) during accumulation phase - see the difference
- Investment strategy not constrained by tax considerations; UK collective would incur tax on income - see the difference
- No capital gains tax on switches between funds
- Added options: 5% tax-deferred withdrawals, assignment facility
Offshore bonds v collectives: the effect of ongoing tax
Many UK collective funds are likely to have an element of interest or dividends within the overall return, even where they primarily target capital growth. Interest arising will be taxed at 20% within the fund and higher rate taxpayers will be liable for a further 20%. Income from dividends will be taxed at an effective rate of 25% in the hands of a higher rate taxpayer.
Because the tax is payable year on year, it acts as a curb on growth, compared with the gross roll-up applying on an offshore bond. The table below shows the effect.
Example
Investment: £200,000
Total net growth rate: 5% p.a.
Higher rate taxpayer
Ongoing values after 5 years
| With interest/dividend element of*: | |||
| 2% | 2.5% | 3% | |
| Collective - income from interest | £245,679 | £243,331 | £241,000 |
| Collective - income from dividends | £249,236 | £247,749 | £246,269 |
| Offshore bond | £255,256 | £255,256 | £255,256 |
*For the collectives, figures assume the interest or dividends are reinvested and money is withdrawn to pay the higher rate tax due. For the bond, it is assumed no withdrawals are made. All figures ignore any product charges.
Use our calculator to input your client's details.
Tools & calculators
- Get an illustration
- Product Guide
Related links
- See this in action with our Offshore bonds for early retirement calculator
- Find out more about Portfolio Account
- Request an appointment with your regional specialist
- Download sample client approach material
- Talk to our Technical Helpline on 08457 11 12 13
