Written by Scarlett Marler, Chartered Financial Advisor.
For many people, retirement planning focuses on building pension wealth. However, some of the most valuable planning opportunities can arise once those benefits are accessed.
This was the case for Mr Jones, a longstanding CMS client.
Having built a substantial pension fund, Mr Jones had already reached his Lump Sum Allowance (LSA), meaning he was entitled to the maximum amount of tax-free cash available under current pension rules.
This raised an important question: should the tax-free cash remain within the pension, where any future growth would ultimately form part of the taxable element of the pension when withdrawn, or could it be used more efficiently elsewhere?
Looking Beyond the Pension
After reviewing Mr Jones’s objectives and financial circumstances, we recommended that he take his available tax-free cash and reinvest it using a combination of a Stocks & Shares ISA and an Offshore Bond.
Mr Jones first utilised his annual ISA allowance, allowing £20,000 to continue growing free from income tax and capital gains tax.
The remaining tax-free cash was invested into an Offshore Bond. This enabled the capital to remain invested whilst providing valuable flexibility in retirement.
Mr Jones was able to withdraw up to 5% of the original investment each year on a tax-deferred basis without creating an immediate tax liability. This allowed him to supplement his retirement income whilst keeping the majority of the capital invested and continuing to benefit from future growth.
However, withdrawals above this level could have resulted in a taxable gain, potentially increasing his tax liability.
A Further Opportunity
When Mrs Jones later retired, a further planning opportunity emerged.
As Mrs Jones had relatively modest retirement income, she had significant unused tax allowances available. This created an opportunity to improve the family’s overall tax position.
Because segments of an Offshore Bond can be assigned between spouses without triggering an immediate tax charge, we were able to transfer ownership of segments of the bond from Mr Jones to Mrs Jones as part of our ongoing planning process.
Mrs Jones could then surrender those segments in her own name, meaning any gains were assessed against her tax position rather than Mr Jones’s. This gave the family greater flexibility when accessing capital. Rather than being restricted to the bond’s 5% tax-deferred withdrawal allowance, larger amounts could be withdrawn and assessed against Mrs Jones’s available allowances.
By carefully managing the amount withdrawn each year, we were often able to utilise her Personal Allowance, Starting Rate for Savings and Personal Savings Allowance, allowing gains to be realised without generating a tax liability.
The proceeds were then reinvested into ISAs each tax year, gradually increasing the amount of wealth held in a tax-free environment.
The Outcome
This strategy delivered a number of benefits for Mr and Mrs Jones:
- Mr Jones was able to maximise his available tax-free cash.
- The capital remained invested throughout, allowing the family to continue benefiting from long-term market growth.
- The Offshore Bond provided flexibility, enabling withdrawals to be taken on a tax-deferred basis whilst preserving future planning opportunities.
- By using Mrs Jones’s available tax allowances, gains within the Offshore Bond could often be realised without generating a tax liability.
- The proceeds were then reinvested into ISAs each year, gradually increasing the amount of wealth held in tax-free wrappers.
- The couple made full use of both spouses’ available tax allowances and ISA allowances.
Most importantly, this strategy allowed Mr and Mrs Jones to retain the benefit of investment growth whilst progressively moving assets from a potentially taxable environment into one where future growth and withdrawals could potentially be tax free.
Had the funds remained within the pension, any future growth would ultimately have formed part of the taxable element of the pension when withdrawn. By accessing the tax-free cash and implementing this strategy, they were able to keep the capital invested, capture future growth, and gradually transfer an increasing proportion of their wealth into ISAs, where it can continue to grow free from income tax and capital gains tax.
Key Takeaway
Retirement planning does not stop when pension benefits are accessed. In many cases, some of the most valuable opportunities arise afterwards.
By carefully reinvesting tax-free cash and making full use of available tax allowances, it may be possible to retain the benefits of investment growth whilst gradually moving wealth into environments where future growth and withdrawals can be accessed more tax efficiently.
Please note: Tax treatment depends on individual circumstances and may change in the future. This case study has been anonymised and simplified for illustrative purposes. Individual circumstances differ and outcomes cannot be guaranteed. The value of investments can fall as well as rise, and investors may get back less than they originally invested.