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Under wrappers

Last week, I looked at the possibility for change to the pension annuity and what may emerge from any wider and deeper review of effective saving to provide for retirement.

I looked in particular at the need to balance the fiscal books in any radical change to the system, especially if there is to be an increase in the amount taken as cash.

A review that takes into account the difficulty for investors surrounding the wholly different tax outcomes depending on what wrapper is chosen and is not too constrained by the legacy of what we have may well lead to attractive results.

Of course, another key determinant in this debate will be the extent to which the Government wants to impose its will on the form of benefit that it believes is “best” for the nation.

This has been a significant influence on the favourable tax treatment given to pension plans to date.

The Government is effectively rewarding with tax relief contributions to plans that will substantially provide an income and, not only that, an income that, at least from the age of 75, is secured by an annuity.

That constraint is, in effect, the price that has to be paid for the tax relief and tax freedom on gains and income. The Government in its paternal role is then seen to be encouraging savings in a medium that does not carry the risks of the entire fund being “blown” on retirement, with the individual then falling back on the state to support him or her.

Most can understand this concern. Whether we agree with it or not and whether it is a realistic concern is another matter. The current private member&#39s bill, broadly speaking, proposes the purchase of an annuity with pension fund money to satisfy an index-linked income requirement equal to the minimum income guarantee and, once this is in place, one should be free to do what you like with the remainder of the fund.

This appears to be not unlike the Irish model. If this route is chosen, then some tax on the cash taken would seem to be only fair.

On reflection, then, one may agree that the mooted careful overall review offers the best way forward at the current time. In the meantime, for those who find appeal in unconstrained drawdown of the type that is being discussed, consideration should be given to choosing wrappers that are currently available to give favourable tax treatment on investment growth, tax-reduced or tax-free output and flexibility over the form and timing of benefits.

Isas, of course, offer this possibility but input is limited.

Growth-oriented collectives offer an opportunity for the investor to invest for the medium to long term and to maximise the use of taper relief and the annual capital gains tax exemption to ensure that the benefits that are taken are substantially tax-reduced and possibly even tax-free.

There is also, of course, no constraint over when the benefits can be taken or the form in which those benefits can be taken.

For those who are keen to actively manage investments by switching funds, an insurance wrapper for their investments (onshore or offshore) may be attractive.

Until we have (if we ever have) a freeing up of the rules on how pension funds can be used, serious thought ought to be given (especially by those who have already provided for sufficient future income through ordinary pensions) to considering wrappers that provide benefits in the form and at the time they are required by investors.

As ever, there is no substitute for a full understanding of the investor&#39s requirements and a good working knowledge of the solutions and structures available (and in particular their tax treatment). Matching the right structures to the investor&#39s needs, both now and into the future, is where the real value of financial advice can be seen.


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