Expatriates planning their investment strategies are often advised to use a life insurance bond. We look at why – and, more interestingly, how to achieve a tax advantage.

A bond issued by a non-UK (offshore) insurance company offers two principle advantages:-

1 – Many separate investments can all be held in one simple package. Switching between funds is straightforward.

2 – Often the tax treatment of the bond is different from that applying to the underlying assets. For example, if a UK resident holds cash on deposit then tax is payable on the interest. When holding that same deposit in a bond, no UK tax is payable until a withdrawal is taken – and even then 5% of the original investment can be drawn without tax at that time.

Unfortunately, unscrupulous advisers can use bonds to generate extremely high levels of commission. This has given bonds a bad press – but as a planning tool they certainly have their place in any tax adviser’s armoury.

Indeed, starting an offshore bond sooner rather than later can make a good deal of sense. That is due to “time apportionment relief”. For example, if you had started a bond in 2000, returned to the UK in 2010 and decided to surrender the whole of the bond in 2011, tax would only have to be paid on one eleventh of the gain. What is particularly attractive is that this relief applies even where the bond has been built up by a number of contributions over many years. So, if you are not able to invest a lump sum but can afford to build up to that lump sum by regular contributions, then the whole of the value in your bond still attracts that beneficial tax treatment.

That is quite convenient as most of us save from earnings, with perhaps the occasional bonus, and simply do not have large lump sums of capital until close to retiring, or just returning back to the UK.

In that case, we can arrange for a bond to accept contributions over a long period of time so it becomes a good home for savings at the same time as you build up a tax advantage. You do need to be careful though about the charges – expatriates wanting to save regularly is a frequent receipt for “rip offs”.

Of course, the same logic applies if you happen to have a larger lump sum. Again, you need to be wary of the level of commission being charged. We are here to help you assess whether a bond is likely to be effective in your own circumstances.

So, overall, bonds are well worth a look when you are tax-planning (but be careful of the commission) and it can make sense to start sooner rather than later.

Bonds therefore have their place in the expatriate’s investment portfolio. For more information on planning your finances so that you benefit more from your savings please get in touch.

The subject of how to handle retirement funds has always been complex.

Until recently, the government made it mandatory for those aged 75 to purchase an annuity (an income for life provided by an insurance company in exchange for a pension fund).

On 9th December 2010, all this changed when the government published new rules which stopped the forced purchase of annuities at 75.

However this relaxation of the rules may just cloud the issue. For many the purchase of an annuity may still be the best, or only, option.

Newer flexible plans and other enhancements made during recent years mean that opting for an annuity may provide the most sensible means of providing for financial security in retirement.

Caution is still required though…

For those with pension funds which would pay at least £20,000 a year there are some very radical changes, and action needs to be taken to avoid a large tax charge.

These changes do also impact those already using a SIPP for drawdown purposes and could have serious consequences on the level of income being taken. If you have any concerns please do get in touch.

Pension planning is one financial task which is better started early and reviewed over time. For more information, please contact us.

It always seems customary at this time of year to give predictions of the year ahead.  Here at The Fry Group we are inundated with the latest thinking from many of the financial world’s key players, and part of our role for clients is to try and make some sense of all of the information. To follow are the, very broad, opinions of a few of the UK’s leading fund houses:

Interest rates are likely to rise in the second half of 2011, but any increase should be minimal – no more than 0.75%.

Equities will be up over the year but the ride may very well be a bit ‘lumpy’

Fixed interest, especially government debt, is likely to be down over the year

There is no consensus about commodities – which receive a fairly even split across all fund houses of up/down or flat

The demise of the Euro in its current state is possible, but difficult to predict given it is primarily a political decision and eventually it may be that there is too much pain for the public in each country to take.

As with any forecasting, it is wise to remember that the points above offer a very broad view. The economic climate has stablised in the last few months, and some economists are talking about positive, double-digit returns being available in 2011, but it is vital that any financial planning takes into consideration your own aims, objectives and attitude to risk. Being a Fry client ensures you have access to managers who can guide you sensibly and ensure that your money is invested in funds that are robust enough to navigate the future. Do talk to us about your individual circumstances and investment aims.

For months the UK Press has reported that thousands of wealthy Britons will actually leave the UK as the burden of taxation increases. For British expatriates who are moving back to the UK the question must be whether they will face financial hardship or ruin on their return to British soil. After all, with the top rate of income tax now set at 50%, will the result be a huge bill to the taxman?

It makes sense to start by looking at how harsh the UK’s tax environment will become. The headlines tell us that those earning more than £150,000 per annum will pay 50% of their income to the tax man. What of those earning more realistic salaries or, crucially in this context, enjoying substantial pensions?

Here is the first example.  A UK resident earning or receiving a pension of £80,000 per annum will pay income tax of £21,930 (an average tax ‘hit’ of 27.4%) resulting in a net income of £58,070.  Of course, the Government will take more of that through VAT, Council Tax and so forth but let’s stick to basics.  In truth, most European countries will tax income at roughly the same rate – if not more – although some (Cyprus for example) have much lower rates. However, the decision to live in Cyprus is more of a lifestyle choice.

Younger expatriates planning their return to the UK can do very little to reduce the burden of income tax on their eventual salaries other than by saving tax-efficiently.  Those expatriates who will receive a pension might be able to reduce the eventual income tax charge via the Foreign Pension Allowance which can exempt 10% of the income from tax in particular circumstances.  It might be possible, subject to scheme rules, for that pensioner to commute a lump sum and, in terms of tax planning at least, that could be a sensible step.

This second example explains why.  An expatriate couple have built up their capital over the years and have a total of £2 million invested in a mix of property, bonds and cash deposits.  Overall that capital generates a yield of 4% or £80,000 per annum.  With some basic tax planning (holding assets jointly) they will pay £10,410 of income tax – an average rate of 13%.  So the retired couple with £80,000 of investment income will pay £10,410 of income tax whilst the person enjoying a similar salary will pay an extra £11,520 of income tax (and that’s before we take National Insurance into the reckoning).

What’s more, with some further planning that income tax liability could be reduced even further.  For example, income tax could be cut to £8,000 (an average rate of just 10%) with net income being £72,000.

So, whilst we should pity the working Briton the conclusion is that those retiring in the UK are able to plan for a much lower contribution to the taxman.  Of course there is still the extra burden of VAT, excise duty on wine and tax on air travel to contend with, but at least these examples will show that all is not as bad as the press might have us fear.

Our example shows the situation for a couple with substantial assets – but do remember that good planning can help whatever your situation. Ultimately, our service ensures you can enjoy more of your own wealth.  If you would like us to help you save tax please get in touch.

The Fry Group is pleased to announce it has been acknowledged in the FTAdviser.com’s highly regarded annual ‘Top 100 Financial Advisers’ listing for 2010.  The renowned listing, which is produced in association with Matrix Solutions, has recognised The Fry Group as one of the top 100 advisory firms across the UK.

The Top 100 Financial Adviser ranking is produced by analysing relevant turnover figures, fees, size of the firm and the split of business between investment, pensions, protection, mortgages and insurance.

This note on pensions deals with QROPS and their recently arrived cousins, QNUPS.  A sensible place to begin is to revisit QROPS.

QROPS (Qualifying Recognised Overseas Pension Scheme) first came to our notice in 2006 as a result of UK pensions ‘simplification’.  The UK authorities recognised that British expatriates had the right to transfer their past UK based pension entitlements to Schemes in countries where they had chosen to live.  There could be advantages but often it just made life simpler to have one’s pension in the new country.  Provided the scheme involved was a ‘qualifying scheme’ (in short, that it had the characteristics of a bona-fide pension scheme) then the transfer away from the UK scheme was permissible.  Transfers from both company pension schemes (defined benefit or defined contribution) or personal pension schemes were allowed although not necessarily advisable.

A QROPS offers potential benefits:

•    Freedom from UK taxation
A UK pension fund enjoys freedom from Income and Capital Gains Taxes within the fund but the eventual pension will usually be subject to UK Income Tax.

•    Investment Freedom
QROPS provide a wider choice and so, for example, it became possible for those expatriates retired elsewhere in Europe to run their pension assets in Euros.

•    Capital for descendants
UK Schemes gave no scope for any residual value of a pension to be left on the death of the pensioner.  Provided the QROPS had value on death, the balance was available to be left to survivors.

That still left the question of UK Inheritance Tax (IHT).  For QROPS investors who had become non-domiciled in the UK, QROPS helped with IHT planning because, as a non-UK asset, it fell outside the scope of UK IHT.  But for those still domiciled in the UK, their continuing liability to UK IHT on worldwide assets meant that the QROPS still attracted an IHT charge.

This situation was seen as unfair because UK-based pension funds were exempt from IHT, so the Finance Act 2008 contained a clause which extended the IHT exemption to qualifying non-UK pension schemes (QNUPS).  For those who come afresh to this area of planning it is important to note that a QROPS will always be a QNUPS (and therefore IHT exempt) but a QNUPS is not necessarily a QROPS.  So, this clarification was very welcome news to those UK domiciliaries who had transferred old pension entitlements to a QROPS.

So, if you are an expatriate here are some basic answers to simple questions.

Should I transfer my pension funds?
If you are a member of a UK company scheme then it is generally dependent on the benefits available in that scheme. The pension from certain schemes are guaranteed to increase in the future and also are protected by the UK’s Pension Protection Fund so it would be down to your particular circumstances as to whether a transfer out would be worthwhile.  For example, you might have a reduced life expectancy, want to have funds to leave to your children or need to produce an income in a different currency to that of your scheme.

Should the transfer be to a QROPS?
Possibly, but QROPS can be expensive (although competition in a young market is having a welcome effect).  A QROPS gives the benefit of being outside the UK so has potential tax advantages and, with its greater investment freedom, can provide a non-Sterling income.  Where you want to keep the benefits in Sterling and have a ‘smaller’ pension pot (say below £200,000) then it could be more effective to remain in a UK scheme but transfer to a personal pension plan.  In that way a lump sum can be available for survivors – not the case with a company final salary scheme.

What about personal pension plans in the UK?
We are on simpler ground here.  Unless the fund is too small to make a transfer economically viable the answer is more likely to be yes.  Bear in mind that you need to have been outside the UK for at least five years (or certain that you will be) to secure tax freedom.

Even if a transfer to a QROPS is not viable, it can often make sense to switch to more modern arrangements with lower costs and greater fund choice.

Should I invest in a QNUPS?
This is much trickier ground.  If you have existing pension funds then they are now free of UK IHT.  Adding non-pension assets to a QNUPS brings ‘challenges’.  A QNUPS must have the characteristics of a pension scheme.  Contributions could be limited and access to the fund, either by way of capital or income, would be expected to be restricted too.

For a non resident, non-domiciled Briton there can’t be any tax reason to transfer assets to a QNUPS.  Freedom from UK IHT has already been achieved on all but UK assets by virtue of non-domicile.  It might be argued that UK assets could be transferred to a QNUPS but, even if that was effective tax planning, access to those assets in the future will be restricted.  So better options might be found.

For a non resident Briton who is still domiciled in the UK then a QNUPS is a more useful means to achieve exemption from IHT. However, do remember that these are pension schemes and the taxman will expect to see them used as such.  It is unlikely that a one-off transfer of a substantial part of an individual’s assets into a QNUPS would be considered as sensible pension planning.

It is quite possible that a realistic part of an individual’s earnings could be built up in a QNUPS whilst the saver was outside the UK and on return to the UK the value of that QNUPS could remain outside the scope of UK IHT.  But do remember that a QNUPS will be expensive and that income drawn when resident will certainly be taxable.  The fact that capital once added cannot be retrieved will be a further deterrent.

Interestingly, there is no reason why a UK resident should not build up funds in a QNUPS too.  For those who will struggle to stash away provision for the future, especially after the harsh changes confirmed in the 2010 Budget, a QNUPS could be a useful adjunct to the now restricted UK pension opportunities.

Of course, in all these things, common sense and informed advice are necessary.  It is most unlikely that any one ‘scheme’ will provide the answer to all one’s tax planning needs.  Hopefully, this note will throw some light on QNUPS but for more individual advice please, as ever, get in touch.

Working overseas can free you from the UK’s rules and regulations.  Nevertheless, some of the UK’s most complex rules still follow you. One of those areas is pensions, and this already complex area is set to get worse.  Our experience has been that many expatriates find it difficult to keep track of any UK based schemes to which they belonged or contributed to before leaving the UK. As a result it can be easy to forget about these frozen pension schemes.

As a means of providing an update on this neglected area, we look at the current crop of changes affecting UK pension schemes and outline the impact on expatriates.

First, some good news.  Those investing in UK-based personal pension plans have long argued against having to draw benefits from a set age (currently 75) and having to purchase an annuity.  Many feel they are capable of managing their finances so as not to run out of income in old age.  The Government has inclined to a different view and insisted that all personal pensions be “annuitized” from age 75.  Now, an air of realism can be sensed in the Government’s latest proposals which, if passed into law, will allow personal pension investors the choice of when to draw their pension at any age from 55 and then being free, if they prefer, to defer their benefits to whenever they choose.  At that point, a tax free cash sum can still be taken and the balance of the fund can either be left invested or used to purchase an annuity.  In short, the constraints are lifted and individuals will be able to choose an option which genuinely suits their circumstances.

For those who are members of a company pension scheme it appears it is business as usual.  It has long been possible to transfer a capital sum from a UK defined benefit (DB) Scheme to a personal pension plan.  This single area has been the scene of much poor advice in the past and such a transfer could only be recommended in very particular circumstances (e.g. where an individual’s life expectancy was reduced and the scheme provided little death cover or survivor’s pension, or where the scheme itself is poorly funded).

Many expatriates have considered transferring to a QROPS (Qualifying Recognised Overseas Pensions Scheme) as an alternative to both company and personal schemes in the UK.  QROPS offer various benefits including:

•    Removal from the UK tax regime
•    Freedom of investment choice
•    Not having to purchase an annuity

The second change concerns Government proposals and their possible effects on UK-based DB Schemes.

For many years, DB schemes have been able to ‘contract out’ of the Government State Earnings Related Pension top up scheme (SERPS). Many have taken advantage of this, but there is a concern that the ‘contracted out’ schemes will not provide an equal benefit to SERPS.  The proposal is that it will no longer be possible to transfer benefits from a ‘contracted out’ DB scheme to a ‘contracted out’ personal plan.

Why might you want to do that?  For now at least, benefits from a DB Scheme are inflexible.  You must take a lump sum and income from a particular age and, as a result there is no ‘pot’ to leave to survivors (although the scheme might provide a widow/er’s pension).

An alternative has always been to transfer from the employer’s to a personal scheme and, as noted earlier, those latter schemes offer greater investment freedom and the ability for any unused capital to be passed to survivors.  However, should Government proposals become law any benefits could become trapped in your DB Scheme.

UK pensions are a notoriously complex area (especially after various attempts at simplification) and the purpose of this is to inform rather than alarm.  More than ever this is an area which requires professional advice and The Fry Group is well placed to help.  If you would like us to run an impartial review of your own pension arrangements please get in touch.

Listen to Graham Barnes, International Director at The Fry Group, talk to Hannah Beecham, a well respected financial journalist and editor of The Expat Money Channel about how The Fry Group works and what we do for clients.

Click here for the podcast.

A summary of the UK Emergency Budget, delivered on 22nd June 2010, is available here.

On 25th May, the Queen delivered a speech which cemented the new British Coalition’s full programme for government. Notably, the plans confirmed that the world of pensions has changed significantly.

In simple terms the long term value of pensions went up, the British public is being forced to start planning for itself, greater flexibility has been added and most will have to wait longer before starting to claim a State pension.

The main announcements were as follows:

• The government will restore the earnings link for the basic state pension from April 2011, with a ‘triple guarantee’ that pensions are raised by the higher of earnings, prices or 2.5%.
  An independent commission will be established to review the long-term affordability of public sector pensions, while protecting accrued rights.
• The ‘default’ retirement age will be phased out. A review will be undertaken to set the date at which the state pension age starts to rise to 66, although it will not be sooner than 2016 for men and 2020 for women. The government will also end the rules requiring compulsory annuitisation at 75.
• The government will explore the potential to give people greater flexibility in accessing part of their personal pension fund early.
  Pensions rules and regulations will be simplified to help reinvigorate occupational pensions, encouraging companies to offer high-quality pensions to all employees, and the government will work with business and the industry to support auto enrolment.

If you would like to review your pension planning, please get in touch.