Much has been written about the need for advisers to move to clientagreed remuneration and adviser-charging. The impact of this move to fees will create many challenges for advisers and clients as costs become even more explicitly shown.
In delivering these changes, the advice model for wrappers will also need to be revisited. Using tax wrappers efficiently to deliver client goals is one of the areas advisers can demonstrate added value.
Overlaying the new charging approach on the wrappers selected will have an impact on the client from a tax perspective. I focus here on single-premium investment bonds but similar considerations will also apply to other investment wrappers.
Investment bonds, before and after the RDR, will continue to offer an excellent tax-deferral vehicle for clients who have often already used their Isa and capital gains tax allowances. They can also be used to receive income without losing personal allowances where taxable income is approaching £100,000 or for older clients with lower incomes to retain the additional age allowance.
These and many other features will continue after the RDR but from the remuneration perspective, the adviser and client will need to consider how the bond is established, whether it is onshore or offshore.
Consider a client with £100,000 to invest after the RDR. The requirement is that advice is agreed and paid for by the client but can be facilitated through the life office product. This can be in the form of the gross or net method, each brings with it some tax considerations.
If we first consider the gross method, then the client invests £100,000 and the life office invests £100,000 and pays the adviser the amount agreed as per the client’s instruction. However, assume the initial fee is 4 per cent of the investment.
This will be a part-withdrawal from the bond and use up £4,000 of the client’s 5 per cent (£5,000) tax-deferred allowance. Assuming a regular fee has been agreed at 1 per cent a year, this will also erode the client’s allowance for this and future years.
Given that the 1 per cent is usually based on the fund value and not the amount invested, this will reduce the amount of 5 per cent allowance available year on year and could even lead to a chargeable event in year one or subsequent years.
The positive, however, is that the 5 per cent tax deferred allowance is based on the full £100,000.
If we now consider the net approach, then the £100,000 is split before investment with £96,000 being invested and £4,000 paid to the adviser.
The 5 per cent tax deferred allowance in year 1 is unaffected but is now set for future years at £4,800 a year.
However, the 1 per cent regular fee will be taken from this benefit. Either way, the impact of adviser-charging requires advisers to revisit their standard advice models and recognise that the taxation of wrappers will also be affected.
Similar outcomes are created with collective investments where ongoing fees are paid as well as helping with payments for third parties such as discretionary portfolio managers.
The industry requires certainty on such arrangements and, as previously highlighted in this column, the impact of VAT for advisers and their clients will add another lay of complexity which will need to be understood and articulated to clients by advisers when outlining their charging basis and business proposition.
Phil Carroll is head of financial planning at Skandia