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Collective thinking

How estate planning fits into product wrapper selection

Continuing my theme in looking at the most suitable choice of retail investment wrapper and encashment/ realisation strategies, we cannot ignore estate planning when making product wrapper selection.

Many investors will, these days, have one eye on estate planning when making an investment that will frequently involve the use of a trust where some degree of control or access is desirable for the donor.

While both collectives and insurance products can be held subject to most trusts, investment bonds can be more efficient and easy to manage because they are non-incomeproducing.

Moreover, the 5 per cent tax-deferred withdrawal facility is a tax-efficient way for an investor to draw a regular cash payment from a plan, say, under a discounted gift trust or a loan trust, with no tax at the time of withdrawal.

It is reiterated that this is not to say that collectives cannot be used in estate planning they can.It is just that a trust will usually be a little more complex to manage if it produces an income.

One benefit of a collective that should not be overlooked, though, is that on the death of the holder of the collective, its base cost will be rebased to the value at the date of death so that all accrued unrealised gains to that point will not be subject to tax.

This uplift on the death of the owner is likely to be lost when the investment is held in trust.

And, of course, there is the very important matter of charges under the competing products to take into account.

In some cases, it may be that the desired underlying investment is only available through one or a restricted number of investment wrappers. This can fundamentally affect the choice of wrapper.

In summary, tax, charges and choice of underlying investment together will influence the choice of wrapper on financial grounds. I have deliberately given greatest attention to tax in this series of articles.

Where value is attributed to a non-financial benefit, like administrative simplicity or ease of holding in trust, then if the product that delivers the benefit also provides the best financial return based on the assumptions made all well and good. Where these non-financial benefits are delivered by a product that does not seem to provide the optimum financial return net of tax (based on the relevant assumptions), the difference in expected financial return will represent the price for these benefits and the investor will have a clear cost-benefit decision to make.

Finally, I must return to the fact that product wrapper choices (for accumulation and drawdown) can only be made based on assumptions.

These assumptions (and, naturally, the current hard facts) need to be specifically agreed and recorded with the client. Remember my foundation theme of the importance of tax-justifying suitability when making investment portfolio wrapper choice.

The assumptions on which wrapper choice is based are the essential starting place for assessing which wrapper or wrappers will be suitable for the investor.

There there is the risk (and there always will be) that the assumptions (for example, on the drivers of growth, future tax rates, available exemptions, etc) will not turn out as expected there must be a case (in the same way that asset allocation reduces risk in portfolio selection) for product wrapper allocation.

One fairly simple and, admittedly, less than perfect way of approaching this is to seek to agree with the client the extent and value of any uncertainty in relation to the assumptions.

Once this is done, model, say, each of two sets of different assumptions (on term, yield, tax, etc) and see if the optimum product wrapper outcome on tax grounds is different. If not, then, arguably, no wrapper allocation may be needed.

If there are different outcomes, then you could seek to determine a likelihood rating, in percentage terms, for each model, for example, 60 per cent likelihood for one model and 40 per cent likelihood for the other and there is your wrapper allocation.

OK, not too scientific and in desperate need of some refinement but we could have, in this approach, the start of a move towards more accurate assessment of suitability and minimisation of the risk of poor outcomes through product wrapper choice.


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