Wrapping up gains offshore

The UK’s unfavourable tax regime and a general disillusionment with pensions is driving wealthy investors offshore, where trust arrangements and wrappers offer more punch per pound.

While pensions remain one of the most efficient ways to save, offshore investment bonds and other wrappers are increasingly being seen as alternatives or supplements to traditional retirement savings.

What’s more, the lifetime allowance introduced at A-Day last year, set at £1.6m for 2007, means there is a limit on how much people can save through pensions, so many high net worth individuals are turning to property, tax-free savings and offshore wrappers to maximise their nest egg.

“The super wealthy are probably not doing onshore investing at all, and the annuities issue for them probably does make it unattractive to save through pensions,” says Mark Polson, head of corporate business, Scottish Life.

“But the tax regime in the UK is unattractive so it’s more likely that they’ll be looking at offshore trust arrangements and offshore wrappers, rather than your basic wrap that’s coming to the market.”

Low interest rates and longer life expectancy are fuelling a growing aversion to annuities as a source of retirement income, with people perceiving them as poor value for money.

“Individuals do not like to see their assets tied up in an annuity and even though we’ve seen bond yields picking up which has meant annuities have become better value, there’s a real reluctance among executives which is why we’re seeing the massive growth in buy-to-let,” says Pat Wynne, a director at Xafinity Consulting.

Offshore bonds have benefits; however they can also be expensive and relatively inflexible when it comes to withdrawing from the investment before maturity.

John Dunn, technical manager pensions at James Hay Wealth Management, says pensions have a distinct advantage over some of the non-pensions vehicles when it comes to taxation.

“When investing through pensions you are in a tax-free environment in terms of income tax and capital gains tax,” he explains.

“If you invest in other investment products offered by insurance companies, like bonds, then in terms of the accumulation fee, bonds do not exist in a tax-free environment. Likewise, under an ISA the contribution you make will be out of your net income and there is a maximum annual investment, whereas an individual making contributions to a pension scheme could pay up to 100% of their earnings and get tax relief, so they’re able to get far more value.”

Yet Ashley Clark, managing director, Needanadviser.com, remains sceptical about the benefits of investments with pension wrappers.

“Given that the government withdrew a number of years ago the ability for pension funds to reclaim dividend tax credit then so what if someone is losing 22% tax relief on the contribution?” he says.

“You are losing 22% but it means your estate keeps 100% of the fund on death.”

Polson adds: “The days of being able to stow huge amounts of money way into a pension as a tax break are gone. For serious investors, pensions are at best now one string to their bow.”

1 October 2007