For obvious reasons, the Government limits the amount that your clients
can invest in tax-exempt investments.
Unfortunately the levels set are always on the low side. The challenge to
you, the IFA, is to make the link between other products and ideas to add
real value to your clients' investments and to your own business. The new
personal pension rules offer such an opportunity.
Other commentators have outlined the general rules for contributing to
personal pensions for non-earners, including spouses, children and
grandchildren. Your clients will undoubtedly seek your advice on this
subject. How do you provide this in a way that is commercial for you?
The maximum annual contribution to a personal pension without any earnings
is £3,600. The Isa market has a contribution cap of £7,000 –
twice that of this pension market.
You are active in the Isa market because of the high volume of cases. Do
you envisage this pension market being twice as big as the Isa market? If,
as I do, you believe this to be unlikely, then read on.
A £1.5m pension fund at 50 is everyone's dream; unfortunately that's
all it is for many prospective clients. However, for £7.69 a day, your
client can help a member of their family to achieve this.
Apart from the inheritance tax issues, which were previously discussed in
this column, there are some key fundamentals you should consider which will
excite both existing and new clients.
The maximum annual contribution of £3,600, net of basic rate income
tax at 22 per cent, amounts to £2,808.
How might your client fund such payments? They could contribute out of
excess income or capital each year. Not very exciting for you or your
client. So how do you make sure that this market is viable for you?
Why don't you consider a packaged arrangement? One that incorporates
university and pension planning for non-earning children and grandchildren
that you could arrange with a single investment. Now you might be more
Consider advising your client to invest £56,160 in a bond. This would
support annual withdrawals of £2,808 to fund their newborn
grandchild's personal pension.
As this is within the 5 per cent tax-deferred allowance, there would be no
immediate tax liability.
The 5 per cent allowance is available for up to 20 years and, on the
assumption that the contribution limits do not change, the grandchild will
have a maximum funded pension for the next 20 years.
The grandparent needs to tell the legal guardian about the contributions,
but I cannot imagine too many offers being declined.
At this point, it would be apt to take a closer look at the numbers. If
your client invested £2,808 net in a personal pension and £56,160
in an onshore bond and withdrew £2,808 each following year then, after
The pension fund could be worth £160,000; and
The bond could be worth £75,000.
If these values at age 20 were left to grow until 50, the grandchild could
amass a pension fund of £1.5m and a bond of £570,000.
Your client alternatively has many planning opportunities using the bond.
The grandparent could assign all or part of the bond to the grandchild to
help fund the university fees and the obligatory student union bar bill.
Alternatively, the grandparent may look to use it for his or her own
benefit. Trusts could also have an important part to play in this whole
So how do you select the product provider for cases such as these? Given
the very long-term nature of these investments, you will probably consider
it fitting to view the funds as a single portfolio.
You will probably be keen to use actively managed funds spread across many
funds and fund managers.
Being able to select a company that offers all this and the same funds
across both its life and pensions range would also be a huge advantage.
It is here that the IFA can add value, not only at product but also, fund
level. This idea, which links suitable product placement, fund selection
and understanding of the chargeable event rules, is a specialist packaged
product which you can nevertheless tailor to suit your clients.
Every year, you successfully maximise your clients' Isa allowances. Here
is another opportunity to maximum fund a low contribution cap product but
with, I hope, high reward for both your client and you.