Long-term Withdrawals Briefcase
Long-term Withdrawals Briefcase
The challenge
- To maximise the potential to sustain regular withdrawals over the longer term
- To retain capital in case of future need or to pass on to others
- To minimise tax on investment growth and withdrawals
- To provide investment choice and flexibility
The offshore bond solution
- Client invests £200,000 in International Prudence Bond
- Withdraws 5% of the original investment each year
- No immediate tax to pay; can take tax-deferred withdrawals for up to 20 years
- Gross roll-up means regular withdrawals will have less of
an impact on capital than they would on a taxed onshore bond
Based on a gross annual growth rate of 6% with an annual management charge of 1%; no product charges included; onshore bond figures assume life fund taxation of 17.5% a yearFund value at year end Year Offshore bond Onshore bond 1 £199,880 £197,801 3 £199,622 £193,142 5 £199,338 £188,113 10 £198,495 £173,720 15 £197,422 £156,292 20 £196,057 £135,190 - Most of the original investment remains intact, if the client needs capital or wants to give it away
- Tax due when the bond is cashed in (fully or partly) will depend on the owner's tax rate at that time
What are the advantages?
- No tax except withholding tax paid within funds; lower growth needed to sustain regular withdrawals without capital erosion - see the difference
- Access to remaining capital at any time, unlike an annuity
- 5% tax deferred allowance enables withdrawals without immediate tax
- Investment strategy not constrained by tax considerations; UK collective would incur ongoing tax on interest or dividends - see the difference
- No capital gains tax on switches
- Assignment facility offers a tax-efficient alternative to cashing in
Break-even growth rates for offshore and onshore bonds
The gross roll-up available on offshore bonds means the growth rate needed to support regular withdrawals without eroding the capital value is lower than for taxed onshore bonds (assuming the same annual management charge for both).
The table below shows the break-even annual growth rates for withdrawals of 5% a year of the investment. These are the minimum gross growth rates needed to maintain the original capital, after allowing for the annual management charge (AMC) shown and life fund taxation on the onshore bond. The figures are based on fund value, without allowing for any tax that might be due on cash-in.
If the actual growth rate is lower, the fund value would fall each year, due to the withdrawals.
| AMC | Offshore Bond | Onshore Bond |
| 1% | 6.061% | 7.347% |
| 1.25% | 6.330% | 7.672% |
| 1.5% | 6.600% | 8.000% |
Based on life fund taxation of 17.5% a year; no product charges included.
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
Related links
- See this in action - use our calculator to input your client's details
- Find out more about International Prudence Bond
- Request an appointment with your regional specialist
- Talk to our Technical Helpline on 08457 11 12 13
