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The wrapper of choice

From a financial planning perspective, tax wrappers offer an excellent opportunity to demonstrate the added value that financial advice can deliver. This is because for many individuals, saving will ultimately be driven by the need to be self-sufficient when they reach retirement.

Much has been written on the recent pension funding changes and the reduced lifetime allowance. For most people, these changes may not cause any problems. However, the lack of access before age 55 combined with low annuity rates mean some clients may want to consider other investment options alongside their pension wrappers to ensure they reach their retirement goals.

Fortunately, retirement income can be provided in many forms and is not limited to traditional solutions such as annuities or drawdown. Isas, collec-tives, bonds and maximum investment plans can all be used depending on a client’s circumstances.

While the various types of wrappers outlined above can all play an important role in providing alternative streams of income at retirement, there is one area that is often overlooked – the taxation of the wrappers’ underlying funds.

Planning ways in which a client’s income can be maximised in future years will also help them understand the value of the advice received and the benefits of holdingmore than one wrapper

With effective tax planning of the underlying assets within the tax wrappers, advisers can add real value for clients.

From a purist perspective, let us assume we have a basic-rate taxpaying client whose pension income uses their personal allowance and who is holding income-producing assets via an Isa and equity distributions via a collective. This would enable the best tax position from an income view. Let me explain.

Dividends are taxed in the same way for a basic-rate taxpayer inside an Isa as they are directly and would suffer a 10 per cent non-reclaimable tax credit.

A fixed-interest type fund would normally come with 20 per cent deducted at source if held directly – which would also be non-reclaimable – but inside the Isa, interest would be paid and received gross.

Although a simple example, maximising income in the current low- interest-rate environment has been a key driver for many clients and this will persist for the short to medium term.

Planning ways in which a client’s income can be maximised in future years will also help them under-stand the value of the advice received and the benefits of holding more than one wrapper.

For higher-rate taxpayers and those paying tax at 50 per cent, exempt income in the above example has added value in the form of the tax saved.

For clients in the accumu- lation stage who are border-line basic and higher-rate taxpayers, the need to shelter income and protect child benefits from 2013 and onwards, if Government proposals are implemented, may drive further invest-ment into tax-incentivised saving schemes.

In the new RDR world, identifying advice points with clients, such as the most efficient wrapper to hold certain assets, will be key to justifying ongoing adviser charging by demonstrating the value of the advice they receive.

Phil Carroll is head of financial planning at Skandia

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