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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.


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