For many IFAs, giving good advice about long-term savings and investments has meant striking a balance between security in old age and liquidity of savings before and after retirement. In taxation terms, this has involved optimising the use of personal pensions on the one hand and Peps/Isas on the other.
Once the early years' struggle to provide a roof over the family's heads and feed, clothe and educate the kids has passed, financial planning is focused on the objective of providing security in retirement. For some clients, that security will take the form of a guaranteed pension income, for others a substantial capital sum or one or more properties free of mortgage.
Even critical-illness cover, life insurance and long-term care cover are ultimately giving security to the client and his or her dependants. That is the whole premise on which the financial planning industry has been based.
The advent of stakeholder should not, therefore, instil dread into the minds of the IFA, rather lift up his spirits. The Government's intention is to do two things – first, to try to persuade those who have taken no steps to contribute towards their future security to do so and, second, to impose reasonable, clear and transparent charges on the products available to make them more attractive to the consumer.
While the first objective is probably doomed to failure from the start and the second has a large proportion of the financial adviser community running for cover, what both these objectives do is to help focus public attention on the issues. The likelihood is that all this change will motivate the better off rather than those who do not currently save. But while that may be bad news for the Government, it is good news for IFAs.
The Government is also giving us the gift of the Individual Pensions Account, a new and transparent vehicle to attract high-net-worth individuals and give them something more sexy than pen-sions to think about.
While there was initial concern that the rebranding of Peps as Isas was likely to result in lower levels of investment due to unfamiliarity and confusion, these fears have not been substantially realised. This type of investment vehicle is relatively easy to understand, clearly priced and has an exciting element of speculation.
The IPA will bring that sexiness to pension planning. It will enable IFAs to talk returns, volatility, cyclical movements and other related con-cepts with their clients – far more exciting than annuity rates and divorce.
While a pension plan has always been an investment portfolio, few have been treated that way, which is probably unsurprising considering the hold that life offices and with-profits funds have had, particularly in the personal pension arena.
There is no greater incentive to invest more in whatever vehicle than the satisfac-tion of making money, even on paper. This means, however, that there is a learning curve to climb for many IFAs as well as their clients so they have sufficient knowledge to exploit the opportunities.
Now, the adviser will be able to lay the whole exciting world of equity returns at the feet of their clients and with less restrictions on using these tools than existed before.
A client with a non-earning spouse (if any still exist) will be able to put an extra £3,600 a year into a clearly priced and portable pension savings vehicle for that spouse, perhaps even the kids.
Someone earning less than £30,000 who is a member of an employer's scheme can also put that amount away. There are none of the investment restrictions that applied to Peps and the whole lot can go into Korean smaller companies or Balkan utilities if the client has an aggressive risk profile.
The IFA who has had a traditional business base in the investment area may have disregarded all the recent furore about the coming changes, thinking his business will be unaffected. This is erroneous but the influence will be positive. He has available an extra weapon in the tax-efficient armoury and one with very few investment restrictions.
His pension colleague, who has never concentrated on investment business per se, may be wary of straying outside his comfort zone and talking investment philosophy rather than product features. These changes will now be forced upon him as his clients become more financially educated themselves.
This may prove uncomfortable for some in the short term but will be rewarding over a longer timeframe. One of the great things about investment markets is that they are in a continual state of flux so there is always something to talk, write or email the client about. This sustained contact encourages client loyalty and interest.
Just consider how far the UK population has come in terms of stockmarket awareness since we were all looking for Sid.
Ultimately, the more funds the client accumulates up to retirement, the more advice he will need once he gets there on income drawdown, savings, inheritance tax planning, and so on. Retention of the client to this stage gives a rich seam for the adviser to mine.
Pensioners now account for some of the nation's richest households. Nearly a third of retired people form the wealthiest half of the UK population. Ten per cent of those are in the richest fifth.
The perception that all pensioners are poor is being debunked. If the financial planning industry grasps the nettle of what is being offered over the next months – Government support for self-provision, increased public aware-ness of the need to save and the benefits of doing so through tax-efficient asset-based vehicles combined with, hopefully, the perception that we offer better value products than ever before – then the future for pensioners and advisers looks bright indeed.
As for the balance of tax relief versus liquidity debate, my advice is use all the tax relief available. From next year, pension tax relief will be on a “use it or lose it” basis.
JAKI PLATT,
Sales manager, nationals & pensions,
Perpetual
