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Pensions are not the only fruitful vehicle

At least three million people are not putting away enough money to see them through retirement, according to the Pensions Green Paper.

Undoubtedly, Work and Pensions Secretary Andrew Smith is right when he says the sheer complexity of the pension system deters many people from making that first move towards catering for their future financial needs. Pension planning is an incomprehensible maze for most people, he says, with eight separate tax regimes.

All this will be simplified under the new proposals. There will be a single lifetime limit of £1.4m on the amount of tax-privileged pension savings an individual can make, as well as an annual limit of £200,000.

Yet the Government says the new rules would allow more than 99 per cent of the population to save more in a pension than they can now. People will have more flexibility in how much they save and when they do so.

The new £1.4m cap on pension fund size is high by the standards of the average investor but has implications for high-net-worth individuals. Anyone who is likely to build a big pension fund will have to consider maximising his or her investments other tax-efficient savings vehicles.

Even for individuals who are not likely to come up against the pension fund cap, there are advantages in spreading their retirement savings. The main one is the flexibility of access to capital this gives the investor.

Isas are the most widely used tax-efficient savings vehicle. Savers and investors like the combination of tax breaks, access to savings in the event of emergencies, flexibility and simplicity that Isas offer.

Self-select Isas are ideal for active share traders. Sheltered within an Isa wrapper, not only is there no tax to pay on capital gains but also the investments held within the vehicle do not even have to be mentioned on tax returns.

The Isa manager is able to reclaim dividend withholding tax of 10 per cent on direct holdings on behalf of the investor, which would not be the case for an individual client holding the same share outside an Isa.

From the financial adviser&#39s point of view, Isas are an advantageous product to sell because customers have longer investment horizons than with some other products. They also typically offer the adviser recurring revenues, for example, trail fees on mutual funds.

We have seen significant interest for a system that will allow intermediaries to manage a client&#39s assets direct with the online broker. In fact, we have made plans to bring in such a system in the second half of this year, issuing the IFA or discretionary broker with a password giving them access to the client&#39s portfolio. This allows them to proactively monitor whether investment objectives are being achieved and can even allow them to deal on their client&#39s behalf.

While it is still uncommon for online brokers to allow clients to have a mix of funds and equities within their self-select Isa, we have found that our customers value the flexibility to combine shares and funds within one Isa.

It is the shares in particular which contribute to the viability of the product for us, because they are often bought and sold within the Isa, which allows us to offer a competitively priced Isa.

Good quality information is crucial for anyone trading directly in shares and funds. Execution stockbrokers do not give tailored advice but they are keen for their customers to invest carefully in the market. To help them do this, online brokers provide tools and information to help clients make an informed choice.

Some online brokers offer fund analysis tools which allow clients to search for a fund by investment objective, sector, size of fund and performance period or even by volatility requirements. Broker recommendations allow clients to find out what some of the biggest investment banks in the world think about the stocks they hold or are interested in.

Self-invested personal pensions also provide a valuable opportunity for tax-efficient retirement planning. They allow the more hands-on investor to benefit from the tax advantages of the current pension system but avoid buying a bundled product. The holder can chase star fund managers but switch promptly to bonds and cash when the time seems appropriate.

Simplifying the pension marketplace is clearly helpful in encouraging the population as a whole to save for retirement. But it is important to remember that there is a wide variety of savers and investors with different needs and levels of sophistication which the financial services community must cater for.

For this reason, there is room for a number of tax-efficient investment vehicles in the UK market.

Whatever decisions are made, two things are vital. First, investors must be confident that they can transfer the holdings they have accumulated in one tax-efficient vehicle into successor products without having to pay penalties. Second, the fewer restrictions there are on how pension savings can be invested on retirement, the better.

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