Pensions should be the first port of call for clients looking to fund their retirement – they are, after all, one of the most tax-efficient ways to save.
However, there can be times when pensions may not be the only solution. For example, you may need to look at alternative strategies for clients who:
- are subject to the tapered annual allowance
- don’t have enough UK earnings to maximise their pension contributions
- want to take advantage of the opportunity to pass defined contribution pensions down the generations free from inheritance tax (IHT)
In my last article, I discussed research we carried out with Cicero that revealed post-pension freedoms clients want advice tailored to their circumstances, with a multi-faceted approach to funding their retirement.
Once the basics are covered, clients want the flexibility of access and income to suit their needs. So, what are the alternatives?
Free of income and capital gains tax, the earlier clients start using their Isa allowance the better.
For example, someone who had saved the maximum amount into an Isa each year for the last 10 years with an average 5 per cent return after charges, would have saved £123,560 and achieved a return of £30,264 – a rather nice tax-free lump sum.
With the Isa allowances having increased over the last 10 years and now standing at £20,000 a year, the savings and potential growth available are worth having.
Clients can take natural distributions or lump sums with no tax to pay as an alternative income option.
What's more, by using Isa funds first they could also reduce their exposure to IHT, now that certain pension funds can be transferred to beneficiaries IHT-free.
Collectives or investment bonds?
After pensions and Isas have been maximised, usually the choice comes down to collectives or investment bonds.
Each has their own merits, and while the advice you give is tailored to your client’s personal circumstances, their tax profile and objectives will be what determines which investment is best. It could be a combination of both.
This is especially true now there has been a change to the dividend allowance, with it reduced from £5,000 to £2,000 with effect from 6 April 2018.
Depending on the yield of a client’s unwrapped portfolio, they could pay more tax on dividends received at their marginal rate.
The table above shows, depending on the yield of the client’s unwrapped portfolio, the impact the recent reduction in the dividend allowance could have on the income tax clients pay on their dividend income.
Choosing the correct investment wrapper for your clients is important, but clearly so is who you choose to manage those assets. Both need to work together as part of an ongoing plan to ensure the client reaches their objectives for each pot they hold.
One of our senior fund managers, Barry Cowen, puts it this way: "Clients may know little, if anything, about the complexities of the investment world. As managers of risk-managed models, it’s vital we move client conversations away from absolute (short-term) performance and towards risk-adjusted performance and, ultimately, outcomes.
“People send their cars for a regular service not for the mechanic to make it faster, but to ensure those cars get us to our destination, and reliably.
"Successful risk management leads to successful performance, and ultimately to clients reaching their goals with maximum comfort.”
In summary, pension freedoms have given advisers the opportunity to create holistic plans for clients based on what they need and want from all the investment assets they hold, not just their pension.