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It takes two

How combining tax wrappers can fulfil individual needs for flexibility

Two hard-to-miss issues concern the uncertain future of alternatively secured pensions and the seemingly unlimited extension to the availability of Isas.

Asps have clearly caught the eye and you cannot avoid the conclusion that they seem to be shaping up to be one of those areas where insufficient thought about the consequences was given by the Government before announcing their availability.

Analogies could be drawn with the zero rate of corporation tax, which caused a flood of incorporations to avoid tax, and the proposal to permit residential property as an investment in registered pension schemes, which prompted perhaps the most intense interest in pensions for many years. Well, perhaps not pensions for pensions’ sake but you know what I mean.

Both opportunities, introduced (don’t forget) by the Government, have since been withdrawn. So the possible outcome for Asps would not be without precedent.

I do not intend to write about the technicalities of Asps or even the interesting argument surrounding equal rights. We are aware that representative bodies are putting together representations aimed at encourag-ing the Treasury to keep Asps generally available. A lot of time, effort and money has been invested on the basis that this flexible method of withdrawing benefits from registered pension schemes will be available.

It seems that since one of the core official objections to the non-exclusively religious availability of Asps is that users could choose to take no or very little income from the fund with the result that the income tax yield from pension funds will be lower than it could be if compulsory annuitisation took place.

There is clearly a view that the individual’s side of the bargain would not be fulfilled in the shape of paying tax after the Government had fulfilled its own side in giving tax relief on the contributions and tax freedom for gains and income arising to the fund.

There is, of course, the small matter of removing the right to reclaim dividend tax credits but let’s not go over old ground. We are, as they say, where we are. And where we are is that it looks increasingly unlikely that Asps, in their current flexible shape, will be available to all and sundry. It may be that they will be abolished. They could be restricted or could change so that a minimum income has to be taken. This is, apparently, one of the suggestions being made by representative groups.

How are the Asp and Isa issues connected? Well, like this. The two main objections to registered pension schemes are:

l Lack of access to funds once invested.

l The compulsion to take an income from the fund and, if Asps are not made available, to buy an annuity at age 75.

Especially with the development of platforms, individuals will be encouraged to consider retirement planning as part of overall investment planning.

After all, the registered pension scheme is just another fund wrapper, albeit one that delivers attractive front-end tax benefits and tax freedom on investments in exchange for no access and the need (dependent on the future shape or availability of Asps) to take benefits, aside from tax-free cash, in the form of income.

The investor needs to decide how much he values the benefit in comparison with the cost and, if there is value, to decide how much of their portfolio they want to wrap in a pension. This will be subject to the annual and lifetime allowances.

For many, the post-A-Day regime offers the possibility of making significant one-off pension contributions. For those who find it hard to give up access to funds, for example, those running their own business, they may choose to invest without the benefit of tax relief but with access, with the option to transfer to a registered pension scheme later when access is not so important.

Thought would obviously need to be given to the tax and economic cost of moving from one tax wrapper to another but there would be the sweetener of tax relief (within limits) on the transfer to the pension.

That is where the Isa might come in. Investing up to £7,000 a year, admittedly without tax relief, into a tax-free fund that is fully accessible would be a strategy worthy of consideration for those who need access to funds. The reassurance that Isa availability is likely to continue into the future will also be of comfort to those planning a long-term strategy. The availability of an Isa allowance to each of a couple will mean that up to £14,000 a year can be invested in this way, regardless of who provides the funds. If Asps are abolished and compulsory annuitisation remains, some may choose to leave their funds in the Isa wrapper and draw down from it tax-free in the way that they want.

For those who want or need to fund more outside a pension wrapper, for whatever reason, including being constrained by the registered pension scheme limits, it will be necessary to look beyond the Isa.

Even here, with thought and advice, the right combination of wrappers can deliver accessible returns that, while not as obviously tax-attractive as the registered pension scheme, can provide a blend of benefits and tax-saving opportunities that can make them attractive to investors, taking all things into account.

It will be necessary to weight the relative importance of the various features and deliverables to ensure that the portfolio and wrappers chosen deliver the combination of benefits that is best suited to a particular client.

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