How to use offshore bonds for retirement planning

Offshore bonds are a key part in retirement planning for many people. But recent pension reform has opened this market up to a whole new market. Helen Morrissey looks at how they can benefit retirement planning strategies...

Offshore bonds have ­always played an­ ­important part in peoples’ retirement planning, but they have primarily been seen as a high net worth solution.

However, the recent decrease in the annual pension contribution limit from £255,000 to £50,000 means that more people than ever are likely to include offshore bonds in their retirement planning.

Chris Allatt, Sanlam UK’s head of technical services, agrees, saying that offshore bonds are ­increasingly ­being considered by clients as an ideal complement to their ­pension planning.

He says: “One major use of ­offshore bonds in retirement ­planning is when people have used up their pension allowances, so we are looking at high net worth individuals who want to save further sums in a tax-efficient manner.

“But while we have traditionally seen offshore bonds as a high net worth solution we are increasingly seeing many more people looking to utilise offshore bonds as part of their retirement planning.”

There are many reasons why a person would choose to invest in an offshore bond. To begin with, offshore bonds can offer clients a wide range of investment options.

There are also a number of tax ­advantages such as the client benefiting from gross roll-up, meaning many ­underlying investment gains are not subject to tax at source.

As with an onshore bond, the ­client can effectively defer when they pay tax on the bond.

This is because tax will not arise until the bond is partly or wholly cashed in or more than the 5% tax-deferred allowance is taken out.

As a result using offshore bonds can give the client unprecedented flexibility as to when they pay tax on the bond meaning that it fits in well with peoples’ increasingly ­flexible retirement patterns. 

“You can’t access your pension whenever you want to whereas you can with an offshore bond,” says Vince Smith-Hughes, ­Prudential’s head of business development.

“This can be very useful, for instance, when someone has had to retire earlier than they planned. If they take their occupational ­pension early, they may well face a charge.

They could also miss out on years’ worth of investment growth and could purchase a lower annuity as a result.

If you have an offshore bond, you can use that to provide a ­bridging income until the time comes to access your pension that is a real advantage of having an offshore bond as part of your ­retirement planning.”

Offshore bonds and IHT

In addition to extra flexibility, offshore bonds can also bring powerful inheritance tax planning benefits if they are placed in trust, according to Gavin Pluck, European director at Guardian Wealth Management.

“For instance, if someone saves into a pension plan, retires at 65 and passes away at 70, the estate could potentially lose the money that was saved into the pension if it was converted into an annuity.

“However, if the client has an offshore redemption bond, then the capital within that bond does not have to be realised on death. Again, the ball is in the client’s court as to when they pay tax.”

It is also worth pointing out that if an offshore bond is assigned to someone else within a trust as part of an estate planning strategy, then it is the beneficiary of the trust who pays the tax rather than the client.

Consequently, it can bring further tax benefits if the husband who is a higher rate tax payer was to assign the bond to his wife or child who is a basic rate tax payer.
Further tax benefits can be utilised by those who live overseas.

Someone accumulating a r­etirement pot in the UK is subject to UK tax rules, unless it is ­transferred to a QROPS.

However, if the holder of the offshore bond is domiciled overseas, then withdrawals from the bond can be taken at more ­advantageous tax rates.

Offshore bonds are also ­extremely portable something that Pluck says is proving ­increasingly popular as more people look to work and retire overseas.

“We are finding that there are two types of clients for offshore bonds,” he says. “Firstly, we have clients who have a pension pot and have excess cash to put into an offshore bond.

Secondly, we have people who don’t have any particular retirement plan in place – they maybe have a couple of DB pots, but they need something with a bit of ­portability.

Offshore bonds and regular savings plans can bring this ­portability to retirement planning.”