Unfortunately, the levels set are always on the low side. The challenge for advisers is to make the link between other products and ideas to add real value to client investments and to their business. The personal pension rules offer such opportunity.
In the run-up to A-Day, many commentators will be outlining the proposed rules for contributing to pensions, including those for non-earners, including spouses, children and grandchildren. Your clients will undoubtedly seek your advice on this subject. How do you provide this in a way that is commercial for you?The maximum relievable annual contribution to a personal pension without any earnings is, and will continue after A-Day to be, £3,600. The maximum contribution for Isas is much higher at £7,000.
However, while Isas are popular, they are not the only tax-efficient long-term saving solution for non-earners. A well planned investment in a bond, for example, can support maximum pension contributions and provide a sizable lump sum that combined provide a very attractive alternative.
A £1.5m pension fund at age 55 is everyone’s dream. Unfortunately, that is all it is for many prospective clients. However, for £7.69 a day, your client can help a member of their family to achieve this. Apart from the inheritance tax issues, which would justify an article themselves, there are some key fundamentals you should consider which will excite both existing and new clients.
The maximum annual contribution of £3,600, net of basic rate income tax at 22 per cent, amounts to £2,808. How might your client fund such payments? They could contribute out of excess income or capital each year. Not very exciting for you or your client. So how do you make sure that this market is viable for you?Why don’t you consider a packaged arrangement that incorporates university and pension planning for non-earning children and grandchildren that you could arrange with a single investment? Now you might be more interested.
Consider advising your client to invest £56,160 in a bond. This would support annual withdrawals of £2,808 to fund their new-born grandchild’s personal pension. As this is within the 5 per cent taxdeferred allowance, there would be no immediate tax liability. The 5 per cent allowance is available for up to 20 years and, on the assumption that the contribution limits do not change, the grandchild will have a maximum funded pension for the next 20 years. The grandparent needs to tell the legal guardian about the contributions but I cannot imagine too many offers being declined.
If your client invested £2,808 net in a personal pension and £56,160 in an onshore bond and withdrew £2,808 each year, then, after 20 years the pension fund could be worth £130,000 and the bond could be worth £50,000.
If these values at age 20 were left to grow until age 55, the grandchild could amass a pension fund of £1,000,000 and a bond of £380,000.
Your client alternatively has many planning opportunities using the bond. The grandparent could assign all or part of the bond to the grandchild to help fund the university fees. Alternatively, the grandparent may look to use it for his or her own benefit. Trusts could also have an important part to play in this whole process.
So, how do you select the product provider for cases such as these? Given the very long-term nature of these investments, you will probably consider it fitting to view the funds as a single portfolio. You will probably be keen to use a leading multi-manager platform which provides a choice of either the biggest manager of manager provider or the biggest range of self-select funds spread across the widest range of tax wrappers. Being able to select a company that offers all this and the same funds across both its life and pension range would also be a huge advantage.
It is in this market that you can add value, not only at product level but also at fund level. This idea, which links suitable product placement, fund management process selection and understanding of the many tax wrappers available, is a specialist packaged product which you can nevertheless tailor to suit your clients.
Every year, you advise your clients to take maximum advantage of their Isa allowances. Here is another opportunity to maximum-fund a low contribution cap product but with, I hope, high reward for both your client and you.