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Case Study: Mip strategy following Budget move

The problem: An executive is paying a regular premium of £25,000 each year into a maximum investment plan as part of his overall retirement strategy. The term was set for 10 years and the client is a couple of years into the term.

Following the Budget, the contribution levels and future tax benefits available on Mips have changed. Do I need to take any action?

The solution
Until the 10-year Mip term is reached, the tax efficiency available on existing Mips has not changed, provided certain conditions are met.

The terms available on a specific policy will need to be checked but, as a general rule, provided the policy premium-paying term is not extended, then the Mip will continue to meet the qualifying rules and the client can continue paying premiums for the remainder of the term.

Once the 10-year Mip term is reached, the situation changes.

If we assume the maturity value of the policy reaches £500,000, and the client (a higher-rate taxpayer) is now looking to draw some benefits but wants to defer accessing their pension pots.

In most cases, if the client extends the Mip, then it will lose its qualifying status, making it unattractive to continue.

The question is what to do with the maturity proceeds, to enable the client to achieve enough tax-efficient “income” without accessing his pensions?

If we assume the client can no longer hold the Mip, that all Isa contributions are already maximised, that no further pension funding is required, the client has the full capital gains tax allowance available and wants to receive £25,000 a year, then the client could consider the following two key products:

  • Offshore bond

This can provide access to 5 per cent tax-deferred withdrawals each year while the investment achieves gross roll-up.

  • Collectives

These can provide access to regular capital withdrawals and, provided the gains realised are less than £10,600 a year, then there is no capital gains tax due on the money received.

The optimum result could be to utilise a combination of both and use offshore bonds to extend the tax-efficient “income” for as long as possible.

Holding the right funds in the right product wrappers will further negate any tax leakage.

For instance, the collective investment could hold low-yield, capital-growth stocks to maximise the growth potential and the bond hold fixed-interest and “income”-yielding stock to maximise “income” tax deferral.

As the table shows, investing all the proceeds into an offshore bond will provide the client with 20 years of tax-deferred “income” until they need to pay any tax.

Investing everything into collectives will only provide 13 years of tax-efficient withdrawals before the clients needs to pay tax.

However, a combination of the two, both an offshore bond and a collective, will provide the client with 33 years before any tax needs to be paid on the “income” received.

Establishing such a portfolio and reviewing the returns and options available year by year, advisers will be able to demonstrate to their clients how their advice process had added value, something which will be key in the new fee-paying world.

Phil Carroll is head of financial planning at Skandia


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