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Take a Pep offshore

April 1999 saw the demise of Peps, replaced by Isas which offer investors the opportunity to make investments of up to £163;7,000 each year tax-efficiently until 2006. However, investors with existing Peps can still transfer their plans between providers.

The potential for this market is substantial and worth serious consideration by IFAs, given that an estimated five million people have more than £163;93bn invested in Peps.

Many investors have sizeable amounts amassed in their Pep portfolios but they may find it hard to keep track of them or their original fund may no longer meet their investment needs.

Changes in Pep rules allow investors to switch to another fund with the same fund manager or widen the scope of their investment by transferring to an investment that their current manager does not offer. This should allow IFAs to tailor clients&#39 Pep investments to meet their needs.

Clients should consider the costs before making this decision as the cost of transfer can range from £163;300 to £163;800 and the manager you leave may insist on an exit fee of up to 5 per cent. Furthermore, depending on the performance of the new portfolio, it may take years to pay off standard transfer costs.

Certainly, clients now app roaching retirement may be seeking to improve the inc ome from their Pep portfolio. Their risk profile may have altered so they may want to move to what might be perceived as a lower-risk port folio.

There are investment alt-ernatives available which inc lude income-orientated funds either using corporate bonds or taking advantage of guaranteed income products. Another option is capital-protected funds which allow inv estors effectively to lock in gains from their portfolio and protect their investment from the ups and downs of the stockmarket.

Another serious issue is tax. Although Peps are tax-effective during the period that they are held by the inv estor, upon death the accumulated value will fall into an individual&#39s estate and is pot entially subject to inheritance tax. Wealthy investors could have amassed Pep portfolios of more than £163;150,000. Add to this the value of a client&#39s main residence plus other investments, and there could be a big IHT bill.

To minimise this, it may be worth contemplating using offshore investment bonds as a means of offering clients continued tax-effective investment performance, with additional tax planning benefits via trusts to pass assets on to chosen beneficiaries in a tax-efficient manner, potentially bypassing any requirement for IHT.

So how does an offshore investment bond compare with a Pep? As with Peps, offshore investments grow free from tax – known as gross roll-up – except for withholding tax which cannot be reclaimed. They do, however, have no upper limit on the capital sum invested.

Offshore bonds are subject to taxation on the gain when cashing in or making withdrawals. But UK investors are still allowed to benefit from deferred taxation by making use of the 5 per cent annual withdrawal limit.

This allows investors to supplement their income with no immediate tax charge. Investors can choose to cash in the investment at a time in the future when their tax liability is lower or transfer ownership to a low or non-tax paying spouse.

This makes offshore an ideal way to invest for retirement, as the bond grows free of taxation.

Offshore bonds can also be held by more than one individual investor. This means that even if the original investor dies, the bond can continue as it can depend on the lives of a number of parties. This is important when using trusts to plan for passing wealth down the family.

Writing a bond in trust can allow investors either to fre eze the value of their investments for IHT purposes or, by placing their investment in trust, remove it from their estate, subject to the seven-year potentially exempt transfer rules.

By freezing the value of an investment for IHT purposes, an investor can effectively give away the investment growth after a certain date while still having access to the original capital.

Placing the investment in trust so as to remove it from the estate may still allow the investor to gain access to their capital at certain times in the future but if they die prematurely, the value of their inv estments may be completely free of IHT. Many offshore life companies will give IFAs expert support with trust planning.

IFAs might well consider looking beyond conventional solutions to their clients&#39 needs rather than merely transferring from one Pep provider to ano-ther. IFAs should remember that the offshore bond is one mainstream product that only they can recommend to their clients without being in competition with other providers. This exclusivity of distribution can help an IFA emphasise their value to their clients and cement this relationship.


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