Page 1 Offshore Bonds for Educational Funding Colin Thores – European Product Development Manager October 2009 This presentation is intended for qualified financial advisers only and must not be relied upon by anyone else. © 2009 Standard Life International

Page 2 Funding university fees Manchester Cambridg e St Andrews Exeter Oxford Reading Leeds York Durham Edinburgh Glasgow Falmouth Cardiff Southampton Birbeck College Teeside Imperial College Bangor Heythorp Dundee South Bank

Page 3 How much will university cost? Two types of costs in higher education are:  Tuition fees  Accommodation and day-to-day living expenses Full time students  Course started in or after September 2006 – maximum annual tuition fees can be charged for 2009/2010 is £3,225* * Source: Direct.gov.uk

Page 4 Why Fund University Costs? Student debt is more than £5,000 for each year of study September 09 starts expected to owe £20,000+ by graduation Push.co.uk survey Aug % rise in debt levels Avg debt in England £5,563 p.a. Avg debt across all years £14,000 (at 6 universities it is £25,000+) Source - Push.co.uk survey Aug 09

Page 5 University is expensive

Page 6 How big is this market? Secondary research from Mintel shows that this is a large and growing market  8 million adults in the UK regularly saving for children and a further 5 million saving occasionally.  The top reason parents are saving is for university

Page 7 Funding University Costs An offshore Bond investment can be used to make a gift to individuals and save income Income Tax and Inheritance Tax Use of assignment rules Utilise policy segments

Page 8 Making a gift - university costs planning Assignment Higher-rate taxpayer assigns offshore bond to non-taxpayer or basic-rate taxpayer e.g. spouse, children New owner cashes in – taxed at new owner’s rates Drip-feed over time to maximise opportunity Result – less tax than if original owner cashed in Making a gift : don’t waste family tax allowances

Page 9 Assignment rules Legal ownership can be transferred directly to another person If gift (rather than for money’s worth) not chargeable event Assessed on subsequent chargeable gains arising Treated as having owned the bond since outset Partial encashment - entitled to top-slicing relief Full encashment - gain calculated as if always owned Withdrawals by donor prior to assignment taken into account when donee encashes b ond

Page 10 Assignment for University Costs Mr & Mrs Client Options Assign segments to spouse for School costs Assign segments to children* for University costs as GAIN can be offset against personal allowance (£6,475 for 2009/10) (* Age of majority 18 in England, Wales & NI, 16 in Scotland) HRT BRT / NRT

Page 11 Funding the costs of further education case study Anthony has an 8 year old son, Curtis. Anthony has £100,000 invested in deposits Anthony is a higher rate tax payer He has a need to provide further education funding for Curtis. The most likely time for bills to arise will be when Curtis reaches 18. Currently the average cost of living for a student is £ per year and course fees are capped at £3, He does not want his son to finish his course with a heavy debt and has asked his financial advisor about ways to fund the debt. 1 – NUS Student experience report – Costs relate to England and Wales in 2009/2010

Page 12 Anthony’s advisor suggests investing £100,000 in an offshore bond. Assuming inflation of 3% p.a. over 10 years, Curtis would need around £11,000 a year to cover fees and his living expenses. When the money is needed, Anthony wants his son to access it in the most tax efficient way. There is essentially 2 ways he could do this. Funding the costs of further education case study

Page 13 Anthony could cash in £11,000 p.a. from the bond Using his cumulative 5% tax deferred withdrawals, Anthony could taken his money without paying tax immediately on the gain. However Anthony pays income tax at the highest rate and does not see this changing for the foreseeable future. So Anthony could pay 40% tax or even 50% tax (with effect from 6/4/2010 if his income and chargeable gains exceed £150,000) on the investment gains. So the issue that Anthony pays tax at the higher rate only defers the problem and does not solve it. Funding the costs of further education case study – Option 1

Page 14 Funding the costs of further education case study – Option 2 Offshore Bonds are normally split into a number of individual policies or segments. Anthony’s bond is divided into 100 segments, and each is assignable to another adult (over the age of 18). The assignee then becomes the legal owner of the segments assigned to them. After the bond has been invested for 10 years assuming 5% growth on the bond, the bond could be worth £162,889. Each segment is now worth £1, (note this figure does not take into account product charges). Assuming Curtis has reached age 18, Anthony can assign 7 segments to him, worth £11,402.23, When Curtis cashes them in, the chargeable gain will be calculated as if he always owned them. The gain will be £4, which is comfortably within Curtis’ personal allowance. As Curtis has no other income in that tax year, he will pay no tax on these gains.

Page 15 Funding the costs of further education case study – Option 2 This means that: Through careful planning, Curtis has the potential to cash-in segments he is assigned each year free of tax. Anthony retains full control of the unassigned segments, meaning he can determine if and when they should be assigned to Curtis. He can now change how these segments are invested and can cash them in if his circumstances change (although this may incur tax) Important Information This example is based on Standard Life’s understanding of law and tax practice in Ireland and the UK at the present time Legislation are liable to change in the future. The future position of a bond or an individuals own tax position may change in the future. This is only an example and may not be suitable for all customers. You will need to take a client’s individual circumstances before making a recommendation

Page 16 Making a Gift – University Costs Planning Assignment Outright gift is a potentially exempt transfer for IHT After 7 years, not in donors estate for tax Result – potential IHT saving Making a gift : don’t waste family tax allowances

Page 17 Inheritance Tax and university fees planning case study – Option 2 Returning to the earlier case study Because Anthony is assigning the segments to Curtis for his maintenance and education, this is treated as a capital transfer for family maintenance (section 11 Inheritance Tax Act 1984). This means that the transferred amounts would be immediately treated as if they were outside Anthony’s estate for IHT purposes. This should be the case as long as: Transfers are made for Curtis’ maintenance and/or full-time course of education and The transfers are made by 5 April in the last year of Curtis course As Curtis is over 18, he must remain in full-time education for this to apply

Page 18 Grandparents funding university costs Assign segments to grandchildren to utilise personal allowance University or other costs Offshore Bond Age allowance “Gross roll up” Wider investment choice Top slicing to commencement (full or partial encashments) 5% withdrawals Multiple lives assured (* Age of majority 18 in England, Wales & NI, 16 in Scotland) HRT Mr & Mrs Client

Page 19 Assignment for University Costs Onshore Bond No credit for tax paid within fund Top slicing to last chargeable event (partial encashments) Top slicing to commencement (full encashments only) Offshore Bond “Gross roll up” Wider investment choice Top slicing to commencement (full or partial encashments) (* Age of majority 18 in England, Wales & NI, 16 in Scotland)

Page 20 Assignment for University Costs Offshore Bond benefits Ability to retain CGT allowance for own benefit Ability to assign to children and/or grandchildren No HRT liability on accumulated or distributed investment income Gross investment growth Gross proceeds (if gain and other income within personal allowance) Wider investment choice Top slicing to commencement (full or partial encashments)

Page 21 Conclusion The ‘true cost’ of funding university is likely to be significant and higher than many people anticipate. Parents need to start planning for their children’s future today An offshore bond offers a number features which make it an ideal solution for many client’s savings requirements.

Page 22 Standard Life International Important information This presentation is for professional advisers only and should not be distributed to third parties. The value of investments and any income from them may fall as well as rise and investors may not get back the amount originally invested. In addition, the value of investments may increase or decrease as a result of changes in exchange rates between currencies. Past performance is not a reliable guide to future performance. Any reference to legislation and tax is based on Standard Life’s understanding of law and tax practice in Ireland and the UK at today’s date. Tax reliefs mentioned are those currently available and may be subject to change. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of this presentation. The value of tax reliefs to the investor depends on their financial circumstances and may vary. This presentation is for professional advisers only and should not be distributed to third parties.

Page 23 Standard Life international Standard Life International Limited is a company registered in Ireland (number ) with its Registered Office at 90 St Stephen's Green, Dublin 2. Telephone number Calls may be recorded/monitored. Authorised and regulated by the Irish Financial Regulator for the conduct of Linked Long Term Insurance Business and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by the Financial Services Authority are available from us on request. © 2009 Standard Life International