For adviser use only – not approved for use with clients. Tax Planning Ideas Investment opportunities for all your clients’ tastes

Learning outcomes Educational Planning:  Understand the potential savings gap in school/university fee planning  Look at appropriate investment vehicles for school fee/university fee planning  Financial planning opportunities for bonds including assignments and estate planning Sustainable Income:  Understand the current economic environment of low interest rates and the impact on clients’  An understanding on the impact of taking withdrawals from investments  Financial planning opportunities for clients looking to supplement their income from their investments

Learning outcomes Estate Planning:  Understand the need for inheritance tax planning  Demonstrate the efficiencies and flexibilities of trust planning  Understand the drawbacks and positives of loan trusts  Understand the drawbacks and positives of discounted gift trusts Tax Traps & Investment Income:  Understand how investment income can cause a tax trap  Look at the options of restructuring investment income  Demonstrate how planning can reduce tax Investing For Limited Companies:  Understand the issues for companies in a low interest rate environment  Demonstrate planning opportunities to manage corporate cash  Understand the corporation tax position for company investments

For adviser use only – not approved for use with clients. Educational Planning “Try not to have a good time….this is supposed to be educational”

 Biggest baby boom for 40 years  University fees up to £9,000 per year  Add on living expenses! What’s happening?

 Save!  JISAs  Bonds  Trusts  “Get a job!!!” Possible solutions?

How to work it out 2 INSERT CALCULATOR

University fees calculator – regular prems

 Replaced Child Trust Funds (CTF)  Offers parents/grandparents tax free way of saving for their children  Deposit up to £3,600 each year  Children under 18 who don’t have a CTF can have one  Ownership passes to the child at age 16 – funds accessible at age 18 JISAs

 Regular £3,600 payments for 18 years  Assume growth of 5% per year  Tax free return in 18 years of £105,000  No income tax  No CGT  Potential IHT

University fees calculator – single prem

Bond flexibility  Offshore bond owned by the investor  Tax deferment until encashment  Assignment of segments to the student  Control of income tax liability  No CGT  Gains on encashment assessed on the student  Personal allowance to avoid/reduce potential income tax  CONTROL

Beneficiaries Customer Bond assignment

University fees calculator Calculations based on initial investment of £21,000, initial fees of £9,000 pa, deferred for 13 years and increasing by 1% pa. Assumed growth for investment is 5% net of charges. * Figure based on 5% allowance for an initial investment of £21,000 accumulated for 12 years.

 Fees  Accommodation  Living expenses  Spending money  Student loan repayment What are you funding?

Higher education CONTROLDiscretionary Trust Bond JISA Children Parent First property purchase Grandparent Living expenses Student loan repayment How it works

How are you funding?

For adviser use only – not approved for use with clients. Sustainable Income

What’s happening  5 years of low interest rate  Savers disadvantaged  £1,000 of savings five years ago today has real value of just £846  Savings of £200,000 have had £30,000 wiped off their value  Investors need to re-evaluate attitude towards risk and look beyond cash

What’s happening Source:

The “real” facts  £20,000 investment into 5% Treasury 2018, currently priced at * and redeemable on 7 Mar Basic rate taxpayer  £20,000 x 100 = £17,  Gross income is £17, x 5% = £  Net income is £ – (£ x 20%) = £  Income yield is £ = 3.46% £20,000  Capital loss is £17, £20,000 x 1 = 3.35% £20, %!!  Approximate net yield is 3.46% % = 0.11%!! * Source as at 7 th Jan 2014www.dmo.gov.uk

Total Return Bid-Bid line chart (from 31 Dec 2008 to 31 Dec 2013), of UK Consumer Price Index and Halifax Liquid Gold 10K Index. Rebased in Pounds Sterling The “real” facts

Total Return Bid-Bid line chart (from 31 Dec 2008 to 31 Dec 2013), of UK Consumer Price Index and Halifax Liquid Gold 10K Index. Rebased in Pounds Sterling

The consumer opportunity £ Years Figures are based on an assumed 3.0% inflation per annum on £10,000. Inflation could be more or less than this. Your clients need to make their savings work harder 10,000 8,000 6,000 4,000 2,000 0 Now

If not cash…where?  Equities?  All about the yield  Risk and return

Equities Total Return Bid-Bid line chart over 60 months (from 31 Dec 2008 to 31 Dec 2013), of FTSE 100 Index. Rebased in Pounds Sterling

Equities? FTSE 100

Distribution funds Total Return Bid-Bid performance vs. volatility scatter chart over 60 months (from 31 Dec 2008 to 31 Dec 2013) from UK ABI Universe. Rebased in Pounds Sterling PerformanceVolatility ABI UK Equity Income ABI UK All Companies ABI Distribution ABI UK Gilts Source: FE Analytics

Distribution funds Total Return Bid-Bid line chart over 60 months (from 31 Dec 2008 to 31 Dec 2013), from UK IMA Universe. Rebased in Pounds Sterling

Where has the performance come from? Total Return Bid-Bid line chart over 60 months (from 31 Dec 2008 to 31 Dec 2013), from UK IMA Universe. Rebased in Pounds Sterling

Comfortable journey risk Total Return Bid-Bid performance vs. volatility scatter chart over 60 months (from 31 Dec 2008 to 31 Dec 2013) from UK ABI Universe. Rebased in Pounds Sterling PerformanceVolatility Invesco Perpetual Distribution AXA Distribution Jupiter Distribution IMA Mixed Investment 20-60% Shares Source: FE Analytics

Multi asset? PerformanceVolatility IMA UK All Companies IMA Global Equity Income IMA Sterling Corporate Bond IMA Mixed Investment 20 – 60% Shares IMA Property IMA UK Gilts IMA Money Market Total Return Bid-Bid performance vs. volatility scatter chart over 60 months (from 31 Dec 2008 to 31 Dec 2013) from IMA Universe. Rebased in Pounds Sterling

Fund Average Return Returns (£100,000 Fund, £6,000 pa income, 5 years) End Value A B C 6% £101,000 £88,500 £100,000 Negative pound cost averaging

Sustainable income Total Return Bid-Bid monthly savings withdrawal chart over 48 months (from 31 Dec 2009 to 31 Dec 2013) from ABI Insurance Universe. Rebased in Pounds Sterling and for regular withdrawals and initial lump sum of £20,000 with a monthly regular withdrawal of 0.43% on 1 st of the month.

For adviser use only – not approved for use with clients. Estate Planning Inheritance Tax (IHT) Planning

Estate Planners

The Conservative Manifesto 2010 …we will raise the inheritance tax threshold to £1m to help millions of people who aspire to passing on something to their children… The dream

For adviser use only – not approved for use with clients. £325,000 £242, /132010/112011/122014/152015/162016/172017/182009/10 £504, /142001/02 The reality

For adviser use only – not approved for use with clients. The reality £325,000 £242, /132010/112011/122014/152015/162016/172017/182009/ /142001/02 +91% +30%

For adviser use only – not approved for use with clients /102011/122012/13 £2.3bn 2010/11 £2.6bn £2.8bn £3.1bn 13% increase Number of taxpayers 17,000 7% increase Number of taxpayers 17,000 10% increase Number of taxpayers 21,000 Number of taxpayers 15,000 IHT receipts

Estate Planning Inheritance Tax IHT solutions

Potential solutions What can clients do? Nothing and pay tax Spend all the wealth Plan

Potential solutions Plan Make Gifts Make a Will Business assets Agricultural Property Give to charity Use Trusts

Pass on money or property whilst the settlor is still alive Why use a trust? Potential to reduce IHT When someone is too young or incapacitated to handle their affairs. Can help with probate

Is the investor UK domiciled? Excluded Property trust: Would the investor consider making a lifetime gift of their investment or the growth in its value to someone other than their spouse in order to reduce IHT? Does the investor require access to the investment? 1.BPR Schemes: Will planning :Protection should be discussed. 2.Would the investor like to consider IHT planning in relation to any pension death benefits? Is the investor happy to limit this access to the amount originally invested? Discretionary Loan Trust Does the investor wish the beneficiaries to have unconditional and unconstrained access to the investment? Are the beneficiaries under the age of 18 (Scotland:16)? Bare Trust No Action Consider Spousal By-Pass Trust Does the investor wish the beneficiary to have an absolute vested right to any income produced form the investment? Is the investor happy to receive a regular lifetime flow of payments? Discretionary/ Bare DGT Discretionary Trust Flexible interest in possession trust No trust necessary: outright gift. Seek professional advice Would the investor like to consider IHT planning in relation to any pension death benefits? No further action Y Y Y Y Y Y Y Y Y Y N N N N N N N N N N Making decisions

Which type of trust to use? NO UK domiciled? YES Give up access to all capital? NO Do you need access to your original capital? YES NO Client may need to consider life assurance Gift NO Excluded Property Trust (Offshore Bonds and OEICS) Regular payments required? YES Loan Discounted Gift Trust Fixed payment Discounted Gift Trust Variable payment

Estate Planning Inheritance Tax Loan Trust

Growth Loan trust SettlorTrust Capital

Loan trust positives  All growth outside the estate  Slows down the growth of an estate  Full access to capital  Tax deferred regular withdrawals

Loan trust negatives  Inefficient  Outstanding loan amount still in the estate  Withdrawals  Negative pound cross averaging  Surrender of units v lost growth on surrendered units

Loan trust So how do you make a loan trust more efficient?

Loan trust examples  Mr and Mrs Smith  Joint estates marginally above the joint nil rate band (£650,000)  Unable to gift a large amount of capital without access  £120,000 investable assets  Growth rate of investments assumed to be 5% pa net of charges

Loan trust – example 1 SettlorTrust Capital £120,000 Growth £60,000 Trust – 10 years Capital £60,000 Loan repayments (pa) £6,000 IHT on death after 10 years is 40% of £60,000 = £24,000

Loan trust – example 2 SettlorTrust Capital £120,000 Growth £75,467 Trust – 10 years Capital £120,000 IHT on death after 10 years is 40% of £120,000 = £48,000

Loan trust – example 3 SettlorTrust Capital £120,000 Growth £135,467 Trust – 10 years Capital £60,000 Write off loan repayments (pa) Using £6,000 joint allowance £6,000 IHT on death after 10 years is 40% of £60,000 = £24,000

Loan trust summary After 10yrsExample 1Example 2Example 3 Fund value£120,000£195,467 Outside estate £60,000£75,467£135,467 Inside estate£60,000£120,000£60,000 Withdrawals£60,000£0 Tax due-£24,000-£48,000-£24,000 Net effect£156,000£147,467£171,467

Estate Planning Inheritance Tax Discounted Gift Trust

Growth Discounted Gift Trust SettlorTrust Capital 7 Years

Recommending a DGT? – choose wisely Repayments are pre-set Repayments must be taken Potential income tax liability at death Settlor repayments can erode capital

DGT with a difference DGT – Fixed PaymentDGT – Variable Payment Immediate discount Regular payment stream Capital for family Immediate discount Regular payment stream Capital for family ‘Natural Income’ Reinvestment options Potential Income Tax benefits

DGT – variable payment Settlor Trust Whole of life plan Capital Fund 7 years

Estate Planning Inheritance Tax Trust Support

Online support

For adviser use only – not approved for use with clients. Tax Traps & Investment Income

Taxing the generations Jack Retired 68 Final Salary Pension £20,000 pa ISA £30,000 Blue Chip Shares/OEICs £100,000 (Yield 3%) Deposits/Fixed Interest £50,000 (Interest 2%) Jack Retired 68 Final Salary Pension £20,000 pa ISA £30,000 Blue Chip Shares/OEICs £100,000 (Yield 3%) Deposits/Fixed Interest £50,000 (Interest 2%) John Civil Servant 45 Salary £55,000 pa ISA £30,000 Blue Chip Shares/OEICs £150,000 (Yield 3%) John Civil Servant 45 Salary £55,000 pa ISA £30,000 Blue Chip Shares/OEICs £150,000 (Yield 3%) Jonathon Accountant 28 Salary £100,000 pa ISA £30,000 Blue Chip Shares/OEICs £150,000 (Yield 3%) Jonathon Accountant 28 Salary £100,000 pa ISA £30,000 Blue Chip Shares/OEICs £150,000 (Yield 3%)

Over £150,000 £8,105 Next £115,630 First £34,370 Over £150,000 £9,440 Next £117,990 First £32,010 Additional rate Personal Allowance Higher rate Basic rate The changing tax landscape IncomeBand2012/132013/142014/15 Tax Free Taxable Over £150,000 £10,000 First £31,865 Next £118,135

Additional rate Personal Allowance Higher rate Basic rate Taxable income – put in the right order Income Band 2014/15 Tax Free Taxable Order of taxation by income type Savings Income Investment IncomeEarned Income Chargeable Event Gains Capital Gains Dividends Rental Income Interest “Fixed interest” income Employment Self-employment Pension Income Investment Bonds Over £150,000 £10,000 Next £108,135 First £31,865

The tax landscape – or so we thought! Age Allowance Child Benefit High Earner ,00020,00030,00040,00050,00060,00070,00080,00090, ,000110, , ,000140,000150,000160,000 Effective rate of tax % Income £

Adjusted net income – component parts Earned income Investment income Savings income Chargeable gains (full gain) Gift aid payments Less Pension contribution (gross) Trading losses = Adjusted net income Bond or ISA Assignment or Pension offset

Reclaiming the tax landscape! Age Allowance Child Benefit High Earner ,00020,00030,00040,00050,00060,00070,00080,00090, ,000110, , ,000140,000150,000160,000 Effective rate of tax % Income £

Reclaiming the tax landscape! Dividends £ 4, % £ 1,625 (Tax Credit) £ % -£ 500

Reclaiming the tax landscape! Dividends £ 4, % £ 1,625 (Tax Credit) £ % -£ 500

Reclaiming the tax landscape! Investment Bond £ 4,500* Deferred Nil * Utilising 3% tax deferred withdrawals

Reclaiming the tax landscape! Investment Bond £ 4,500* Deferred Nil * Utilising 3% tax deferred withdrawals

Tax wrapper considerations Source: Technical Connections “Techlink” (Collectives v Insurance Products) “As a rule of thumb, all other things being equal, for capital growth driven by capital gains a Collective looks ‘tax best’ and for reinvested income (especially for higher rate taxpayers) the insurance bond looks ‘tax best’. And where there is a mix? Well, it all depends ………” “As a rule of thumb, all other things being equal, for capital growth driven by capital gains a Collective looks ‘tax best’ and for reinvested income (especially for higher rate taxpayers) the insurance bond looks ‘tax best’. And where there is a mix? Well, it all depends ………”

Tax and collectives No tax within fund Investor pays 18% or 28% on gains over allowance Gains Within fund, received net of 10% tax credit Investor pays 0%, 22.5% or 27.5% additional tax Dividends Within fund, received net of 20% Investor pays 0%, 20% or 25% additional tax Interest/Income

Tax and onshore bonds Within fund after indexation relief and expenses Investor pays additional 20% or 25% on net gain Gains Within fund, received net of 10% tax credit No further liability Dividends Within fund, received net of 20% No further liability Interest/Income

Which wrapper for higher rate tax payer? Bond Collective ISA Absolute Return UK Growth Comm Property Fixed Interest Equity Income Global Growth Cash MM Smooth/ G’teed Choice will depend on individual circumstances but it is important to consider the potential income arising

Going for growth? Pos 1Jupiter Merlin Income PortfolioInvesco Perpetual High Income Z 2Invesco Perpetual DistributionInvesco Perpetual Distribution Z 3Invesco Perpetual High IncomeJupiter Merlin Income Portfolio I CI 4Newton Global Higher Income 5M&G Global DividendInvesco Perpetual Distribution 6M&G Optimal IncomeInvesco Perpetual High Income 7Artemis IncomeSL Inv Global Absolute Returns Strat P1 8Invesco Perpetual Monthly IncomeNewton Asian Income Fund 9F&C MM Navigator DistributionHenderson Cautious Managed Fund I 10Newton Asian IncomeInvesco Perpetual Income Z 11SL Inv Global Absolute Return StrategyM&G Global Dividend Fund I 12Cazenove UK Smaller CompaniesCazenove UK Smaller Companies Fund 13Ignis UK PropertyArtemis Income Fund Class I 14Henderson Cautious ManagedJupiter Merlin Income Portfolio 15Cazenove UK OpportunitiesM&G Optimal Income Fund A 16Cazenove MM DiversityInvesco Perpetual Monthly Inc Plus Z 17Investec Cautious ManagedCazenove MM Diversity A 18M&G Strategic Corporate BondISA Cash Park 19AXA Framlington UK Select OppsNewton Real Return Fund 20Jupiter IncomeInvesco Perpetual Monthly Income Plus Top 20 selling funds via Cofunds and FundsNetwork for Sept 2013

For adviser use only – not approved for use with clients. Investing For Limited Companies For adviser use only – not approved for use with clients.

Small company  ‘Historic Cost’ accounting rather than ‘Fair Value’  2 or more of the following conditions:  Annual turnover must be £ 6.5 million or less;  Balance Sheet total must be £ 3.26 million or less;  Average number of employees must be 50 or fewer  FSCS protects such small companies  Post RDR Bond charges become attractive to business owners

Points to be aware of….  Large investments by company in relation to their own value  CGT Entrepreneur's Relief  20% rule re “investment company”  IHT Business Property Relief re ‘excepted’ assets  Barclays v CIR SpC158  Insurance Bond  Cash  Lack of 5% tax deferred withdrawals; Adviser Charging  FSCS for LARGE companies not applicable

AERNotice / TermDeposit 120 Day notice issue1.86%120 Day£ Day Notice Business Savings Account Issue 21.80%95 Day£ Month Notice Deposit1.55%3 Month£ Day Notice1.51%95 Day£ Day Notice Deposit1.50%40 Day£ Day Notice Business Savings Account Issue 81.50%100 Day£5000 Business Instant Access1.50%Instant£ Day Notice Business Savings Account Issue 11.45%60 Day£ nd Issue Branch Saver1.36%Instant£ Day Notice1.26%95 Day£1000 The interest rate issue Source: 2 nd January 2014http://moneyfacts.co.uk/business/business-savings-accounts/

Source: Bank of England Inflation Report November 2013 Unemployment

Inflation Source: Bank of England Inflation Report November 2013

Target markets Onshore Bond: taxed internally Offshore Bond: taxed on encashment Life fund tax fully meets C.T. Life fund tax = C.T. at 20% C.T. on encashment - may be mitigated by losses C.T. on encashment - may be mitigated by losses Main rate becomes 20% Example A Example B

Example A: onshore bond  Company A invests £100k in an onshore bond in 2008  Uses the Historic Cost Basis  The fund increases in value every day  For valuation purposes, premium paid is used each year  In 2013 Company A decides to encash 50% of the fund  Valued at £140,000, surrenders £70,000  Gain of £20,000  Gross profits of £200,000 for 2013/14 ~ pays 20% C.T.

Example A: calculation  £20,000 net gain (life tax paid - 20% deemed)  Gross equivalent?  £20000 x 100/80 = £25,000  Apply 20% corporation tax = £5,000  £5,000 already paid so no further tax to pay

Example B: offshore bond  Company B invests £100k in an offshore bond in 2008  Uses the Historic Cost Basis  The fund increases in value every day  For valuation purposes, premium paid is used each year  In 2013 Company B decides to encash 50% of the fund  Valued at £150,000, surrenders £75,000  Gain of £25,000  Gross profits of £400,000 for 2013/14 ~ ‘marginal’ C.T.

Example B: calculation  £25,000 gross gain (no tax paid)  Apply 23.75% corporation tax = £5, in 2013/14  Significantly less in 2014/15 (Marginal Rate 21.25%)  Corporation Tax rate unified => £5,000

Main rate of Corporation Tax The main rate of Corporation Tax applies when profits (including ring fence profits) are at a rate exceeding £1,500,000, or where there is no claim to another rate, or where another rate does not apply. In addition to the rates set out in the above table, the main rate of Corporation Tax for 2015 is set at 20 per cent. The small profits rate will be unified with the main rate, so from 1 April 2015 there will be only one Corporation Tax rate for non-ring fence profits - set at 20 per cent. Main rate of Corporation Tax The main rate of Corporation Tax applies when profits (including ring fence profits) are at a rate exceeding £1,500,000, or where there is no claim to another rate, or where another rate does not apply. In addition to the rates set out in the above table, the main rate of Corporation Tax for 2015 is set at 20 per cent. The small profits rate will be unified with the main rate, so from 1 April 2015 there will be only one Corporation Tax rate for non-ring fence profits - set at 20 per cent. Source:

Prudential Summary

Strong brand Access to a unique range of funds Investments managed by specialists - PMG Guarantee options (PruFund) Choice of tax wrappers & trust solutions Complete all-round package

PruFund Total Return Bid-Bid line chart since start of data, 25 Aug 2009 from UK ABI Insurance Universe. Rebased in Pounds Sterling

PruFund Total Return Bid-Bid performance vs. volatility scatter chart over 48 months (from 31 Dec 2009 to 31 Dec 2013) from UK ABI Universe. Rebased in Pounds Sterling PerformanceVolatility FTSE PruFund Growth Fund S PruFund Cautious Fund S Halifax Liquid Gold 10K Source: FE Analytics

Expected growth rates

Dynamic Portfolios Active risk management Cautious Growth DefensiveBalancedAdventurousCautious Portfolio Management Group (PMG) Dynamic Portfolios

Risk profiling AdventurousBalanced Cautious Growth CautiousDefensive Dynamic Portfolios Defensive Balanced Cautious Growth Cautious Adventurous Defensive

Balanced Cautious Growth Cautious Adventurous Dynamic Portfolios Risk profiling

Cautious Growth AdventurousBalancedCautiousDefensive Dynamic Portfolios Defensive Balanced Cautious Adventurous Risk profiling

Dynamic Portfolios Defensive Balanced Cautious Growth Cautious Adventurous Risk profiling

Dynamic Portfolios Total Return Bid-Bid performance vs. volatility scatter chart over 47 months (from 1 Feb 2010 to 31 Dec 2013) from UK ABI Universe. Rebased in Pounds Sterling Source: FE Analytics

Learning outcomes summary Educational Planning:  Understand the potential savings gap in school/university fee planning  Look at appropriate investment vehicles for school fee/university fee planning  Financial planning opportunities for bonds including assignments and estate planning Sustainable Income:  Understand the current economic environment of low interest rates and the impact on clients’  An understanding on the impact of taking withdrawals from investments  Financial planning opportunities for clients looking to supplement their income from their investments

Learning outcomes summary Estate Planning:  Understand the need for inheritance tax planning  Demonstrate the efficiencies and flexibilities of trust planning  Understand the drawbacks and positives of loan trusts  Understand the drawbacks and positives of discounted gift trusts Tax Traps & Investment Income:  Understand how investment income can cause a tax trap  Look at the options of restructuring investment income  Demonstrate how planning can reduce tax Investing For Limited Companies:  Understand the issues for companies in a low interest rate environment  Demonstrate planning opportunities to manage corporate cash  Understand the corporation tax position for company investments

Important information This presentation contains some forward thinking statements which should not be taken as fact. Information given is based on our current understanding, as at December 2013, of current taxation, legislation and HMRC practice, all of which are liable to change. No reproduction, copy, transmission or amendment of this presentation maybe made without the written permission from Prudential. “Prudential" is a trading name of The Prudential Assurance Company Limited, of Prudential Annuities Limited and of Prudential Retirement Income Limited. This name is also used by other companies within the Prudential Group, which between them provide a range of financial products including life assurance, pensions, savings and investment products. The Prudential Assurance Company Limited and Prudential Annuities Limited are registered in England and Wales. Registered Office at Laurence Pountney Hill, London, EC4R 0HH. Registered numbers and respectively. Prudential Retirement Income Limited is registered in Scotland. Registered Office at Craigforth, Stirling FK9 4UE. Registered number SCO Authorised and regulated by the Financial Conduct Authority.