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Tax-efficient withdrawal planning tool

This financial planning tool has been designed to demonstrate how a UK authorised investment fund (collective) and a single premium investment bond can be used together to create tax-efficient withdrawals.

Tax-efficient withdrawal planning tool

The tool combines the use of the 5% tax deferred allowance for bonds alongside the part disposal formula and annual exemption for capital gains tax. It assumes investment portfolios have been selected to achieve the selected growth. The assumed yield on the collective is zero. Where the yield is greater than zero there would be a liability to income tax and the yield would be paid in addition to the withdrawal shown.

This tool does not provide advice or select one withdrawal route over another. Instead it provides you with additional options which may help in the financial planning process.

How to use the tool

Each input section of this tool is variable.

The growth rate is capped at 8% for each investment wrapper.

Wrapper charges are not included in the calculation, hence you may wish to assume a lower growth rate to reflect the charges you feel would apply to each investment wrapper.

The growth rates do not differentiate between net and gross returns. This will allow you flexibility to apply the growth rate you feel would apply depending on the nature of the fund and investment wrapper eg UK life fund 5.6% or offshore fund 7% (example purposes only).

The default on any numerical input is 0.

The output

The tool calculates when tax could be payable, based on the investment returns and withdrawals taken. Values are shown to a maximum of 40 years.

If a 5% withdrawal is taken from the bond, a tax liability would potentially arise after 20 years. Reducing this and increasing the withdrawal from the collective could extend the period of tax-efficient withdrawals without impacting the actual level of withdrawal received.

Where interest or dividends are distributed from a collective an immediate liability to income tax will arise. This is not addressed in this tool.

Growth above that assumed in the calculation may result in tax being payable earlier than expected. Annual reviews are essential when using this approach to withdrawal extraction from either a bond or collective.

Risks

Investment returns will fluctuate and this will mean that the gain calculation for collectives and bonds will vary. A year of significant growth for the collective could mean that more 'gain' and less capital is realised on a withdrawal with the potential impact of tax being paid earlier than expected. The CGT assumption may also not increase in line with assumptions made.

 Old Mutual Wealth accepts no responsibility for actions taken or refrained from being taken following the use of this financial planning tool. Old Mutual Wealth accepts no responsibility for unit performance or actual tax liabilities created based on the principles applied to this tool. Individual circumstances will be different and unit growth is unlikely to mirror the actual assumptions made. This financial planning tool has been developed using Old Mutual Wealth’s current understanding of legislation as at 1 March 2010.

This article does not constitute financial advice and Old Mutual Wealth accepts no responsibility for any action taken or refrained from being taken due to this article or related articles and tools.

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