Investing in later life requires consideration of a number of factors. As investors reach retirement age, they may need to preserve the wealth that they have already created while trying to achieve ongoing investment growth above the rate of inflation. They may also wish to take an income from their investments and maximise the amount that can be passed on to their heirs. A cross-border life assurance policy may help these investors to achieve their financial objectives.
As well as providing a tax-efficient financial planning tool, a cross-border policy can provide life assurance cover, enable regular withdrawals to be taken to supplement retirement income and enable investors to access the flexible investment vehicles available through professional asset managers. When combined with a suitable trust arrangement, such a policy can be very effective in inheritance tax planning and in nominating beneficiaries, which can be extremely useful if the investor lives in a country where civil law codes apply, such as France or Spain.
Inheritance tax planning
A cross-border policy is a popular tool to help reduce an investor’s liability to inheritance tax (IHT), which is often a concern for those at this point in their lives. The main rate of IHT is 40% and this applies to the chargeable amount above a nil rate band, which is currently £325,000 (frozen until April 2021). A cross-border bond can be assigned to individuals or trustees without triggering an income tax or capital gains tax charge. Individual segments of the bond can be assigned to different beneficiaries, which provides great flexibility. As the bond does not generate income, the trustees have no income tax reporting responsibilities unless or until a chargeable event occurs.
IHT planning is also a good way to develop professional connections, as the client’s lawyers and accountants may well be involved in the planning discussions.
Retirement abroad
For those who decide to live outside the UK during retirement a cross-border bond can be very useful. Investments can grow virtually tax-free (whereas those held in an onshore bond would be subject to UK tax). Withdrawals from a cross-border bond will normally be subject only to the tax rules of the country in which the investor is resident and this could be an advantage if that country’s taxes are lower, or if it offers a favourable position for the taxation of life assurance policies.
If the client returns to the UK and has been non-UK resident for five years or less, any chargeable gains that arose while they were outside the UK will be treated as income in the year of their return and a tax liability may arise. Time apportionment relief and top-slicing relief may reduce this liability.
Education funding
Retired investors may wish to contribute to the education costs of their grandchildren, helping to support them through university. A cross-border bond is a tax-efficient way of achieving this, as individual segments of the bond can be assigned to the student (provided they are over the age of 18). The student can then cash in segments, using their own personal allowance to cover or offset the chargeable gain. This can save tax, at the same time as ensuring the investor remains in control of the bond, as they can assign only as much as the student needs each time.
Assisting with the provision of school fees needs a different approach, as segments cannot be assigned to people under the age of 18. Instead, the bond could be put into an absolute trust for the benefit of the child, and the trustees would be able to encash segments to meet the school fees, with the tax being assessed on the child beneficiary.
Consider their own needs first
Before finalising any investment plans it would be prudent to consider the client’s wider needs. For example, can they access enough money at short notice to cover any medical bills or healthcare requirements, especially if they are residing outside the UK? Do they need to consider funding for their long-term care needs? What risk profile is appropriate for an investor at this stage of life?
The best way an investor can ensure that the important factors are all given proper consideration is of course to obtain professional financial advice. The Association of International Life Offices (AILO) has a number of independent guides that are designed to support the advice provided in this way and one of these is the client-facing guide entitled “A guide to investing in cross-border life assurance products for clients of retirement age”. This is available to download, free of charge, from AILO’s website www.ailo.org
