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Out with the old, in with new pensions

Stakeholder blight and further proposed changes to the retirement planning

market have confused investors, created a number of challenges to

conventional thinking and taken their toll on new business levels.

For many high-net-worth individuals, stakeholder is an irrelevance.It is

time to seek out new ways of planning.

An offshore life bond can easily be defined as an alternative retirement

contact or, to borrow Mr Blair&#39s vernacular, a “new pension”.

Unlike conventional pensions, tax relief is not granted on investments

into these new pensions. However, there are significant advantages which

new pensions can offer in terms of flexibility, tax efficiency, admin ease

and death benefits.

Significantly, unlike conventional pension schemes, there are no

complicated restrictions or regulations on maximum benefits or

contributions on new pensions and, through offshore investment bonds, new

pensions can be highly tax-effective and grow largely free of tax.

Offshore investment bonds also offer much more flexibility to the investor

at the end of their investment term compared with the restrictions of

annuity purchase and income drawdown.

Income from an old pension is taxed directly as income in retirement. You

didn&#39t think the Government was going to give you all that tax relief on

the way in and not get it back at a later date?

On the other hand, while part of the proceeds of these new pensions are

subject to income tax at the investor&#39s highest marginal rate, there are

still a number of tax planning solutions that can go toward minimising tax

and potentially removing it.

For example, a well-known advantage of these bonds is the 5 per cent rule,

where an investor can withdraw 5 per cent of the original capital sum free

of any immediate personal tax for up to 20 years.

Even in the case where the bond has been held for some time before taking

a withdrawal, the annual 5 per cent allowance accumulates, allowing a

bigger tax-deferred withdrawal.

Even better, if the new pension investor chooses to spend a year away from

the UK as a tax resident, the bond may be fully encashed with no further

tax liability, depending on the individual&#39s tax status.

If the bond is reinvested, then, upon resuming UK tax residency, the

investor will be able to make 5 per cent tax deferred withdrawals from

their bond based on the higher amount.

However, these new pensions have a further advantage – there is no

requirement to declare 5 per cent withdrawals on a self-assessment return.

So, in my view, the biggest benefit of a new pension is that, unlike old

pensions, they protect you from Hector the taxman.

Protection from the burdens of admin and self-assess- ment is an often

forgotten and yet key benefit which new pensions can offer over existing

restricted pensions.

One of the most important advantages which new pensions have over old ones

is in the area of death benefits.

On death, an old pension may pass a reduced pension on to the surviving

spouse but ultimately back to the life office&#39s estate. No wonder life

offices call it death benefit – they benefit when clients die.

A new pension offers a more equitable solution. The only people who will

benefit from an investor&#39s death are the investor&#39s family. For example, if

an investor is taking 5 per cent withdrawals from their new pension, on

death, the bond will persist and the spouse can continue with the same

level of income.

In addition, on the second death, there is likely to be a value to the

remainder of the bond that can be passed on to future generations. In fact,

by appropriate use of trust planning, this asset can be passed on to chosen

beneficiaries in a tax-efficient manner, potentially bypassing any

requirement for inheritance tax.

This type of pension offers the flexibility of contributions, asset

control, income control and, depending on the investment, selected risk

control.

They allow investors the flexibility to define when they want to take

their income and, because of this, they can exert an element of tax

control, something which old pensions cannot achieve.

New pensions represen-ted by offshore bonds can provide IFAs with an

attractive, tax-efficient and flex-ible alternative free from the political

football which old pension funds and contracts have to endure.

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