View more on these topics

Pensioned off

In last week&#39s article on the importance of wrapper choice in determining pension alternatives, I highlighted the importance of the tax treatment of the various retail investments that can be used in this decision-making process.

The tax implications of the various product wrappers are relatively well known among advisers. For many of their more affluent investors, a non-pension pension strategy may involve a mix of product wrappers if the tax benefit and access balance is to be optimised.

Isas can give everything that an approved pension can give when it comes to tax-effectiveness apart from tax relief on the contributions. However, access to funds, no compulsion to buy an annuity and benefits in the form of entirely tax-free cash or income are seen by many as a reasonable payback for giving up front-end relief.

Even collectives (beyond Isas) can give substantially, if not entirely, tax-free emerging benefits with little tax along the away if the focus is on growth-oriented funds and careful use is made of taper relief for longer holds and the annual exemption, say, in rebalancing and general investment management.

The vastly underused annual exemption can also be useful when encashments are eventually made, applying, as it does, after taper relief.

For any regular investor in collectives, though, it is worth remembering that the identification rules applying to disposals of shares or units of the same class need to be carefully borne in mind when building and projecting a non-pension pension strategy founded on investing in growth-centred collectives over a period with gradual (albeit highly flexible) realisations taking place when benefits are required.

The general rule to be observed for shares acquired after April 5, 1998 (ignoring the same-day and bed-and-breakfast rules) is the last-in-first-out rule. This provides that the investor is deemed to dispose of the most recently acquired shares first. This need not necessarily yield an unattractive result although it will have an impact on the level of taper relief available to the various disposals that take place.

The point about using the annual exemption is that while there are relatively well known anti-bed-and-breakfast rules applying when the investor wishes to realise and reacquire purely for the purpose of uplifting the capital gains tax base value or realising a loss, there is no such problem with anti-avoidance when the investor actually wishes to dispose of investments. The point here is that the main reason for the disposal is an investment one. The availability of the unused annual exemption (£7,900 in full) will help to enable good portfolio management/rebalancing to take place often without triggering a liability.

Year on year, this will serve to gradually rebase parts of the acquisition costs of the overall portfolio, reducing the amount of unrealised capital gain, which must be a good thing from a tax standpoint.

For some, consideration may also be given to investment-focused life insurance products as part of the strategy.

Where a range of investments are chosen to create a non-pensions pensions strategy, it may be attractive to the investor and the adviser to consider holding or aggregating details of those investments on an appropriate technology platform. There can be very few of you out there who have not heard of wrap accounts, individual managed accounts or master trust accounts, all of which, as far as I can see, are pretty much the same thing – a means of holding details of and managing, buying and selling investments on behalf of clients.

For any innovation to be accepted by the market at which it is aimed, there should be a demonstrable and easily appreciated benefit. If not, why bother to change what you are doing?

When it comes to wrap accounts (I will call them that from hereon in), it should follow that if all or the substance of one&#39s investments are held on the wrap platform, it will be easier to secure details of and manage one&#39s investment holdings, gains and income from them in a coherent and joined-up form.

In addition, by having the capability to manage, sell and buy investments from a single place, there should be worthwhile economies of scale. These should manifest themselves in the form of reduced charges, acquisition costs and disposal costs.

The basis of these economic benefits being secured is the wrap platform provider (not unlike a super/hypermarket in a true retail sense in selling food, drink, provisions and so on) using its bulk buying power to secure these lower costs from investment managers who wish for their products to be on the shelves of the platform provider.

The greater the volume that the wrap provider can promise or, better, actually deliver, the more value that an investment manager will place on being on the platform.

The providers of these platforms include any business that, having appreciated the benefits that such platforms can deliver, are prepared to develop, buy or licence the technology/software to run the wrap platform so as to make a profit over a reasonable period from the fees charged (directly or indirectly) for the use of the platform.

Undoubtedly, some existing financial services providers will (and some already do) provide access to a wrap platform for their tied sales force or other distributors and/or IFAs through whom they wish to do business.

Recommended

Matrix sponsore Foresight top-up

Matrix Money Management is sponsoring a top-up share issue for the Foresight technology venture capital trust. The directors of the VCT, which was established in 1997, aim to raise up to £3.5m to make further investments in information technology, communications and technology-based manufacturing companies. This could mean a second round of investing in companies already […]

Pensions deficit could disappear if investment conditions right – Standard Life Investments

A 20 per cent increase in the global equity markets over the next two years combined with a 1 per cent increase in corporate bond yields would eliminate the pension deficit as an investment concern says Standard Life Investments chief investment officer Keith Skeoch. Skeoch says: “Clearly, rising equity markets are part of the solution. […]

Lloyds TSB hit with £2m misselling fine

Lloyds TSB has been hit by the FSA with a £1.9m fine for the misselling of structured products and told to set aside a further £98m for expected compensation payments to investors over 22,500 sales of the product. The fine, which had been widely expected, comes the same week as the Group replaced Scottish Widows […]

Property freedom for Sipps could transform UK economy, says Ritchie

Allowing Sipps to invest in residential property could be as significant a policy move as Margaret Thatcher&#39s decision to sell council properties to tenants in the 1980s, says pension guru Stewart Ritchie.Speaking at Money Marketing Live in Manchester this week, Scottish Equitable director of pensions development Stewart Ritchie said if rumours that the Inland Revenue […]

Life cover for life

Jennifer Gilchrist Proposition Lead – Design, Royal London When someone mentions whole of life plans, most people will think of a niche product that serves as an inheritance tax planning tool for high-net-worth clients. And it’s really not surprising they’ve been pigeonholed in that way because before the arrival of RDR in 2013, that’s more […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment