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Low margin, high volume

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&#39 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&#39s dream; unfortunately that&#39s

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&#39t 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&#39s 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

20 years:

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&#39 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.


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