Financial planning considerations following a year of change
Paul Richards: Well, good morning, everybody, and welcome to our latest webinar in which we'll be looking at planning opportunities up to and beyond the end of the tax year. There has been an enormous amount of change over the last couple of years which has had a significant effect on the financial planning landscape. Indeed, the various Spring Budgets and Autumn Statements have introduced major changes which have affected all of the main tax wrappers. I'm joined today by my colleagues, Paul Squirrel and Jon Hale, and over the next 45 minutes we'll examine these changes and look at how they're likely to impact you and your clients. We won't be taking any live questions, but many of you have pre-submitted questions and we'll do our best to answer these during the session.
[00:44]
So, Paul, I’ll start with you, if I may, and it be useful, I think, to start with a reminder of what legislative changes have actually been announced.
Paul Squirrell: Yes, it's a good question. As you said in your introduction, Paul, there's been a number of changes over the last year or so. If we go back to the Autumn Statement 2022, we had the announcements of changes to capital gains allowances and dividend allowances, some of which came in this year. And the rest are coming in from next year. Then we had the Spring Budget and it was a pensions bonanza, basically, in terms of increases to allowances, to the annual allowances, tapered annual allowances, and then we also had the announcement and, I think, surprise announcement about the removal of the lifetime allowance restrictions, lifted for fixed or enhanced clients, so all of that – great news for pensions planning.
We did have the announcement that the plan was to remove the lifetime allowance completely through further legislation, which started dripping out in the summer, and then in the Autumn Statement we had sort of a ratification, basically, that it would be abolished for next year, the lifetime allowance, together with a few changes around ISA legislation. So, as you said in your introduction, quite a busy year, to say the least.
Paul Richards: Okay. Let's focus on pensions for a moment and remind us of the known changes and what they mean for tax year end planning.
Paul Squirrell: Yes, the known changes are the changes that came in in the Spring Budget, which were ratified by Royal Assent in July. So, we had the annual allowance going from £40,000 to £60,000. Those affected by the money purchase annual allowance can now put in £10,000 rather than £4,000. Those who were fully tapered, who could only put in £4,000 before, can now put in £10,000. And even the limits at which the tapering starts has gone from £240,000 to £260,000, which means increased contributions for everyone – somewhere between £6,000 and £30,000 additional annual allowance for everyone for the current tax year. But the real game changer, Paul, for me, was the removal of the LTA tax charge, because that's going to be the real changer in terms of people making contributions and it makes sense to do so now.
Paul Richards: Okay. We'll come back to that game changer in a moment if we may. But you mentioned the increased annual allowances – I think you mentioned between £6,000 and £30,000 – I guess that's going to depend on individual circumstances, right?
Paul Squirrell: Yes, very much so. A simple example of somebody affected by the money purchase annual allowance – it's a straight £4,000 to £10,000. But, where it's going to be worth revisiting is those people, for example, high earners, where, let's take an example of somebody who was tapered in the previous tax year and had adjusted income of £320,000, well, in the previous tax year, anyone who was over £312,000 would have been fully tapered and would have had an annual allowance for that year of £4,000. Same client, same circumstances now – £60,000 over the threshold – that's a reduction of £30,000. But, because the annual allowance starts at £60,000, that’s now £30,000. So, that individual – same circumstances, two tax years – £4,000 one year, £30,000 the next.
Paul Richards: Okay, thanks. Let's get back to your game changer – and that's the lifetime allowance. And it maybe just me, maybe a little bit counterintuitive, but I don't understand why it makes sense for somebody to continue to contribute once they're above the lifetime allowance.
Paul Squirrell: Well, that's a good point. I think the starting point is to think about the policy intent when it was introduced. This was all about growing the economy and about the fact that there had been, basically, a brain drain of people leaving the industry, leaving employment because of punitive charges in pensions. So, think about that, the intention with the removal of these restrictions. So, this is not a loophole. This is actually policy intent to allow people to contribute. But, if you think about this, take somebody with a defined contribution arrangement who’s over the lifetime allowance, previously you wouldn’t have contributed because of two things. One, you wouldn't get any PCLS entitlement. And secondly, you’d be subject to a tax charge of at least 25%. Now that the tax charge has gone, it changes the situation. And, if you go through the maths for somebody like that, provided they don't pay more tax when they take the money out than they got tax relief on the way in, which you wouldn't expect them to, the very worst-case scenario is the maths works the same as paying into an ISA but with IHT-free benefits. So, it's a complete game changer there. If you look at somebody with a defined benefit arrangement, then it's even more so because, not only can they carry on making contributions, but if their defined benefit didn't give the entitlement to the full PCLS entitlement, then they may be able to get more PCLS as well. But, it's going to be a challenge to identify these clients, I think.
[05:58]
Paul Richards: And that's a good point and, Jon, an appropriate point in which to bring you into the conversation, if I may. In the context of identifying those clients, where's the best place for our advisers to start?
Jon Hale: Yes, it's a good question, Paul, because we've had a number of people asking what information do Fidelity provide to not only help with tax year end considerations, but also to manage good outcomes under Consumer Duty. And we do have quite an extensive range of business-to-business reporting that we make available, that will help advisers manage the assets on the platform. I just want to focus specifically on pensions for now. I would recommend downloading a copy of our Pension Summary report. It contains lots of really useful information to help manage those tax year end considerations that Paul was referring to.
Just to pull out a few highlights. Contributions – it will give you the contributions paid in the current and also the previous three tax years. And that data is based on the pension input amount. So, it's relevant for any carry forward calculations. And over the years a number of advisers have always commented that they've looked for that information via the Annual Benefit Statements, or even tried to calculate it themselves by downloading the transactions on the platform. But neither of those will actually give them the figures based on that pension input period. So, really, the Summary Report is the sole place to go and it can save time if you are looking at carry forward exercises.
In terms of allowances, obviously, as Paul mentioned, it's important to know if clients have triggered the money purchase annual allowance and also the date they triggered it, and the report will help you filter out those clients. And, if advisers are suddenly considering making contributions for clients who are near or over the lifetime allowance, then the report will also help create that target list. So, it will identify those clients they could be speaking to.
And, although I'm focusing primarily on tax year end considerations, it does also give you a whole host of other information. And, I think it's important to point out that one of those is it will identify all those clients who are yet to make an Expression of Wish. For those that have, it will also give you beneficiary information, nominee information. And I think, importantly, it will also show the date it was last updated. As we know, it's quite important now to keep an up-to-date Expression of Wish in place to ensure beneficiaries really can access the full range of options on the death of the member, including beneficiary flexi-access drawdown.
Paul Richards: Okay. Paul, I'm going to come to you in a moment, but Jon, before we go on, remind me how to get that report.
Jon Hale: Yes. So, it sits on the platform, it's available to download at any time. It's under Reporting Services. It's called the Pension Summary Report and the data is always being refreshed. So, whenever you need it, you can just instantly download it.
Paul Richards: Does the adviser have to request it?
Jon Hale: They don't have to request it.
[09:03]
Paul Richards: Okay. Paul, coming back to Jon's point about death benefits, remind us where we are in relation to the taxation of death benefits?
Paul Squirrell: There's been a bit of flip flopping going on this year, to be fair. First thing to say ‘over 75’ hasn't changed. If you're over 75, benefits are taxable. But beneficiary drawdown being very important there because you receive a lump sum and it's taxable, it's all taxable in that year, of course, versus a beneficiary drawdown where you can control the tax when it comes out. As I said, there was a bit of flip flopping, there was a bit of concern when the initial draft legislation came out in July because there were comments that beneficiary drawdown would be taxable regardless. But there's been a U-turn on that, which is good to know. What they've said now is, in a sense, the treatment for next year will be the same as it is now. Beneficiary drawdown death under 75, regardless of the size of the funds, will always be tax free. Lump sums will be subject, as they are now, to tax if the benefits are over a certain limit. So, to Jon's point, which is a good point about reviewing Expression of Wish, it's really important, first of all, to make sure the Expression of Wish is up to date and relevant, but also make sure the contract offers beneficiary drawdown because, of course, not all of them do.
Paul Richards: Yes, okay. And, Paul, we talked earlier about changes which are already in force. But also about changes which aren't in force – where are we with those?
Paul Squirrell: Yes, the big one being the replacement legislation for the lifetime allowance from next year. We had a lovely Christmas present, which was about 100 more pages of legislation to work through over that period, which kept us off the mince pies a bit! But we've been ploughing through it, to be fair. One initial observation, much of the framework, to be fair, it's a change of terminology, but much of the framework looks like it does for this year. One initial observation is, it seems, reading through the legislation, that it will create opportunity for additional PCLS for certain individuals. Now, I sort of touched on one of those earlier when I mentioned about DB clients because you might be able to fund more pensions and get additional PCLS. But the other one is for those clients who have already taken benefits pre-April next year but wouldn't have taken their full PCLS entitlement – many of those will be DB clients. To give you a quick example, somebody who has used all of their lifetime allowance currently and let's just say they've taken a DB scheme pension, their default position at the moment is they've got no PCLS entitlement and that's their default position next year. However, there is this thing called a transitional tax-free cash certificate that you can apply for where they actually use the amount of tax-free cash that you've actually had and take that forward into next year. So, it looks like it'll be possible to reinstate the whole lot.
Paul Richards: Right, okay. Maybe it's just me, Paul, but the concept of a of transitional certificate is something I'm not familiar with.
[12:05]
Paul Squirrell: It’s not just you, Paul. Definitely not. As I said, it's buried in 100 pages of legislation. There are a few important things about this certificate.
The first thing is that if you want to rely on one of these certificates next year, you only have the option to rely on it before your first crystallisation event in the new year. So, once you've had a crystallisation event in the new year, you can't apply for a certificate. So, it will be something that people will need to think about in the run up to the end of the year.
The second thing is that you can apply to any pension provider. So, it's not an HMRC form. It's a provider form – any provider where you have an active pension or pension arrangements – that you can apply to them provided you can give them accurate information of the events that have occurred before, they will provide a certificate, but they've got up to three months to provide that certificate. And that's the other thing to bear in mind, because if you're thinking about taking benefits in the next year and you want to rely on the certificate, you've got to bear in mind it could take a while to get this, but more information will unfold. Obviously, we will provide information on this as and when we get it, but it's definitely something to bear in mind for now.
Paul Richards: So, definitely not HMRC? It's down to the providers and it's down to the advisers to ask the providers? Okay, fine. Thank you. And, Jon, can I come back to you at this point and let's talk about client income, which is obviously really important to most people. What practical steps should advisers be thinking about before the end of the tax year in this context?
[13:32]
Jon Hale: Yes, I will touch on the practical considerations but, before I do, I think it's important just to refer back to that same report I referred to previously. That information that we supply will give you all the tax code data that we hold on clients. So, as soon as we get an update from HMRC, we do upload that both to the platform and to the Pension Summary report. So, I think that's a useful starting point because it will enable advisers to, for example, identify clients with a full personal allowance and potentially those that can take some more income before the tax year end. So, I think as a starting point, again, use the reporting available.
I think if we touch on more practical considerations – we're not here to cover process today – but one of the key questions we always get asked in the lead up to tax year end is regarding payment timescales. How quickly can you get a payment to my client? And, I think to speed up payments, the one tip I would give is, if it's at all possible, consider holding money in the pension cash account. That would be the pension savings account for any PCLS. It would be the pension drawdown account for any taxable income. And, I say that because if cash is available, we can typically get payments out within a day. If a crystallisation has to be made first, then you can now target which assets are crystallised. In other words, which assets are we going to move from the accumulation account into drawdown. Again, if you are able to hold cash, then it does speed up the payment of both PCLS and any residual taxable income that the client is waiting for.
[15:16]
Paul Richards: Putting money in cash is really important in terms of the speed of payments. If I haven't done that, I've not got round to doing it, how long is it going to take?
Jon Hale: Yes. If they haven't done it, there's absolutely no requirements for cash management on the platform and I just need to make that clear. I'm talking about speeding up payments if cash is available, but Fidelity will automatically disinvest assets. And you can tell us which assets to disinvest. Typically, we'll see timescales of around about four to five days. It depends really on the fund settlement times within that portfolio. But as soon as all the funds are settled, we'll make those payments.
Paul Squirrell: I just want to say on the subject about taking money out – Jon, you're absolutely right, the considerations for using allowances, etc., up until the end of the year. But, of course, there will be a lot of people taking money, for instance, for the first time up until the new year. And one of the things I understand that the report is very good for, because it gives you the tax codes, etc., is to look at that report early in the new year, because you can see there the money taken, how much tax is deducted, the tax code – I'd say it's a pretty good trigger, would you say, for reclaiming tax?
Jon Hale: Absolutely, yes. As I said, it will provide all the tax code information. It will even tell you whether it's a month one or a cumulative tax code. So, yes, it does give you that flexibility to go out and filter that information.
Paul Richards: Okay, great. I said at the start we've had some pre-submitted questions and a lot of those are focused on whether clients should crystallise benefits where they're at or over the LTA. What are the pros and cons of that approach?
[16:49]
Paul Squirrell: Yes, first and foremost, Paul, it's going to be very client centric, isn't it? If a client wants to access benefits, as Jon was just talking about, you're going to have to make a crystallisation unless you've already got money in drawdown. But the question then is how much do you crystallise? And I know, some of the questions, do I crystallise all of it?
I think, what I would say is, you've got to weigh out the pros and cons based on current legislation. Because, if you're going to crystallise and take £1.25 million plus in tax-free cash out of a pension environment, what are you going to do with it? Because it might be taken out of an IHT-free environment. And as we mentioned there a moment ago, if a client dies before 75, the whole fund can be passed on tax free and outside the estate. What are you going to do with it, if you're going to do something with it, what is that? Probably going to pay some tax on the growth as compared to tax free over here. So, there's not really a right or wrong answer, Paul, but it is laying out that. If I left it where it is, this is a situation. If I take it out, this is the situation. And having a balanced conversation with the client, what that means. So, yes, it's going to be very individual.
Paul Richards: Okay, let's change the subject slightly. And again, picking up on questions our advisers have asked, there has been an awful lot of media coverage about a potential change of government. And we're not here to speculate on which party is going to be in power in the future, but what impact would a change of government have on the landscape?
Paul Squirrell: I think it's fair to say no one would know, really, Paul. I get where these conversations are coming from because certain comments were made after the Spring Budget last year about the lifetime allowance and what would happen with that. But what we can guarantee is that, whether or not there is a change in government, legislation will change. The fact that we're sitting here today to have a chat about what's happened over the last year or so, just goes to serve that legislation will continually change and we need to adapt accordingly. What I don't think we can do is make recommendations based on speculation.
I'd be pretty certain that every advisory firm paraplanner out there will have suitability reports that will say something along the lines of ‘my advice is based on current legislation that may be subject to change in the future’. So, that's how the advice should be based. To move away from that, to me, is a high-risk strategy.
[19:17]
Paul Richards: But going back to what we've talked about earlier, there are some generous allowances and, I guess, it just makes sense to make the most of them while you still can?
Paul Squirrell: Exactly.
Paul Richards: Okay, understood. Let's change tack, if we may, Paul, and turn to ISAs and again remind ourselves of the changes that have been announced in respect to ISAs.
Paul Squirrell: So, there were a few changes announced in the last Autumn Statement. Things such as being able to have multiple subscriptions to the same ISA type and the tax year for next year, certain new investment options, such as property funds with notice periods, long-term asset funds. One thing did catch my attention, and that was the announcement of the harmonisation of adult ISA ages. Currently 16 and 17-year-olds have the option to do both the junior and the full adult subscription allowance – that will be removed from next year. So, I suppose it's just a planning point, not everyone's got the money to do it, but if you've got clients with children, grandchildren, and this is something you want to consider, you need to do it before the end…
[20:21]
Paul Richards: It is effectively a reduction, isn’t it?
Paul Squirrell: You could say it's a reduction. Yes. Or you could say why were they allowed to do it in the first place? But yes, it is something to consider before the end of the year. But what hasn't changed is the subscription limits, what hasn't changed is it's ‘use it or lose it’. Get the allowance used. We’ve said, obviously, the importance of pensions allowances, but after that using the ISA allowances. But if you've got unwrapped assets, absolutely, use it. But also use the allowance if you've got available capital. I know it's a tough market environment, but they're all alternatives, you know, get the money into the ISA allowance.
[21:03]
Paul Richards: Okay, Jon, if I can turn to you for a moment, you talked about cash in a different context earlier, but with the dramatic and sudden rise in interest rates, we've seen cash emerge as a viable asset class. And advisers are asking us all the time about how they hold cash within an ISA alongside other investments, what options exist?
Jon Hale: Yes, I will come back to answer that. But can I just touch on the point you made about using the allowance? I think the first place to start is to identify those clients who do have unused allowance. And again, I'm going to talk about reporting once more, we have an ISA contribution report that will show you all the clients with unused ISA allowance. It will also identify those who hold money in a General Investment Account, which obviously they can use to move across via the Bed and ISA process. So again, just a starting point, that gives you your target list for clients to be talking to. I think the second point I want to make is, before we talk about cash, there are other options. So, if the client wants to take less risk or wants to control the risk, I should say, you can actually phase a lump sum contribution into the ISA account. And that can be done into your chosen investment strategy up to anything up to 99 months. So, really, you can really have quite an element of control. It doesn't have to be invested in one go.
But, of course, we do know, as you said, that a lot of clients are asking about cash investments. And I think how you do that will fairly much come down to your investment proposition. For those advisers who are picking funds and building bespoke portfolios, then simply you can just buy cash assets alongside any other asset. And that's the Product Cash Account. It could be cash funds. But for those advisers who are running centralised investment propositions – so that could be advisory model portfolios, you could even be outsourcing to a discretionary MPS – then one option available to you is to open a new and separate ISA account when investing this year's allowance. And what that will obviously enable them to do is run a completely different strategy from the main account, i.e., a centralised investment proposition in the one, cash strategy in the second.
And just on that point, we're talking about new money here, but clearly there's a demand also for existing money moving into cash. And we are starting to see a number of advisers splitting an existing ISA account on the platform and creating a separate ISA strategy with cash being that second. And I think what that's helping with is to combat some of those conversations about ‘I want to move off and buy a one-year fixed term deposit’.
Paul Richards: Okay.
Jon Hale: And it also obviously gives the adviser more control because keeping the money on the platform, obviously it makes it very easy to switch back into the market when the time is right. And the other point just to make is the adviser can also control their earnings so they can retain a fee on those cash assets, which could be the same as the main account, could be different, depending on what they deem appropriate.
Paul Richards: We’re seeing it quite a lot in practice, are we not?
Jon Hale: Yes, we're seeing that in practice. In fact, you can run – I'm talking about two accounts here – you can run multiple accounts, it doesn't matter. It could be different strategies across multiple ISAs. But, yes, you’re seeing advisers creating a separate cash strategy.
Paul Richards: I'm sorry, Paul, I’ve cut across you.
[24:30]
Paul Squirrell: I was going to say just coming in there on the point that Jon was making there about fees. Yes, you're absolutely right, I think it's great that you can have a separate fee strategy for the cash holdings because you have different investment requirements to maybe discretionary management. But, one thing I've observed is, to me thinking about this, the ISA has a finite amount that you can pay in. And it doesn't seem to make sense to me to take fees from the ISA arrangement. Obviously, there's been a long-standing thing about pensions, because if you can pay more into pensions and get tax relief in your fees, it makes sense. But the ISAs, to me, it's always different. And, of course, pension fees have to be from pensions assets – wouldn't it be lovely if we could work that differently? But to me it makes sense – keep as much money in your ISA as possible. We've only got a finite amount of allowances so you don't have to, am I right in thinking, Jon, take the fees from the ISA account itself?
Jon Hale: Yes, absolutely. There are other options. And one of those is for the client to fund a separate, standalone Cash Management Account. And that money can then be used to pay fees in respect of that ISA. Therefore, you’re preserving the value in your ISA account. Now, of course, when I say that I am conscious of the fact that what you're asking clients to do there is put more money in. So, you're asking them to fund this year's ISA allowance and some additional money to cover fees.
What we are seeing is typically advisers who are taking that approach typically holding about a year's worth of ongoing fees. But, in some respects, it's not too dissimilar to the way we see a lot of initial fees paid today. It's quite common for us to receive £20,000 plus the initial fee on top. It's just taking it one step further for the ongoing fees. And, if a client does also have a General Investment Account in their name, then they do have other options. For example, they could fund the Cash Management Account so that you’re not disinvesting from either the ISA or the General Investment Account. Or if the client doesn't want to do that, they could just target the General Investment Account for those fees in respect of the ISA. So, they do have quite a few options available to manage that.
[26:45]
Paul Richards: So, I can fund from other tax wrappers, but definitely not the pension because, just to reiterate that point, you'll get in a lot of bother with unauthorised payments and that sort of thing. Yes, okay, understood.
Paul, if I can come back to you and let's look at investments outside of pension and ISA, specifically General Investment Accounts, which we've just touched on. And there's been some fairly significant reductions in allowances to the gains allowance and dividend allowance. So, what impact are those going to have?
Paul Squirrell: Well, before I come to that, first things first. We've talked about the importance of using your pension allowances. We've talked about the importance of using your ISA allowances. What is important, because we know those allowances are so valuable, is that you consider being able to continue to use those allowances. Just to put some context on that, everyone's got an annual allowance, as it were, for their pensions somewhere between £3,600 and £60,000. You've got then £20,000 that you can pay into an ISA. If you're advising a couple, you can double that up. Over a five-year period – if my maths is correct and tell me if it's not – that's somewhere between £236,000 and £800,000 worth of allowances over five years. So, whatever we do next, we're saying for the client’s own savings, we need to make sure that we have and retain the ability to access funds to use those allowances.
You're right to bring this up. Of course, it does come up on a very frequent basis. What we're talking about here – we're putting our IHT planning aside for one moment because use of trusts may determine wrappers – but we're looking purely from people investing for themselves. Yes, the allowances should be considered, but that's just the point – they’re allowances, you know, they are allowances. I often hear people say, well, with the reduction in capital gains allowances and the frequent trading, does that mean that you shouldn't use a General Investment Account? Just remind yourself, anyone paying tax is better off in an Investment Account for capital gains tax, you'll pay the lowest rates of tax. You do have allowances. But, moreover, what I think this highlights is the importance of active management for capital gains. So, to use the allowances, you are going to have to sell something. We always talk about gains don't we? Capital gains – must use my capital gains allowance – but it's important to remember that utilising capital losses can just be as good. If I have a capital loss in a year and I report it to the Revenue within four years, I can carry that forward indefinitely and use it at my discretion after certain annual allowances.
When we're thinking about capital gains allowances, what we should be thinking about is, the worst place, in a way, you don't want to be in at the end of the year is where you've got neither a gain or loss in your portfolio, because you'll be certain that your underlying funds probably will. So, could I utilise this to my advantage? Am I holding things in the right, tax-efficient manner? That's another thing to consider – if you've got a couple of different tax rates, higher rate, lower rate, doesn't it make sense? I think the capital gains management is really important.
[30:02]
Jon Hale: You mention a point there that you almost don't want to be in a position where the account has made no gain or loss. And I think this is where – just referring back to reporting again – this is where it can really help. Because, if you run account level reports – so take the unrealised gains information that we provide – it will show the gain or loss at fund level, so that obviously the account may look neutral in terms of its gain or loss, but the funds may give a completely different picture. And that obviously enables advisers to manage the position by targeting certain funds. So, whether that be to create losses, to your point, or whether that be to target gains to utilise the allowance or a combination of both. Those reports do help you to manage that position for that client's account.
Paul Richards: And that is all well and good and sounds all very sensible, but many advisers watching this will be running model portfolios or outsourcing to a discretionary MPS, as you touched on earlier. So, doesn't that make what you're talking about quite difficult to achieve in practice?
[31:05]
Paul Squirrell: Anecdotally, but what I have seen is a number of advisory firms take a slightly different approach to the way they utilise Investment Accounts. It's not the tax tail wagging the investment dog, but actually being able to control the asset allocation means that, and using these allowances, losses, etc., means that it's going to create an overall better return for the client. But what I would say to your point, if you are outsourcing using an MPS, it doesn't mean you can't do capital gains planning at all. There are still things you can consider, such as how – where Jon mentioned earlier about taking fees – if you're not taking fees from the Investment Account, then it's going to limit the amount of trades and make it easier to control the capital gains. And also, I'd say Bed and ISA. So, with Bed and ISA from a discretionary-managed General Investment Account in the same we would anyway – but thinking about how you manage the Bed and ISA process.
[32:00]
Jon Hale: Yes, the Bed and ISA is totally flexible. It doesn't matter whether you're linked to an MPS or not. The options for investing are not, don't have to be the same as the options for disinvesting. So, even if you're buying model portfolios, you can still target individual funds to manage that capital gains position. Again, you could be selling proportionally, you could be targeting funds because you're trying to create losses and gains – we're going back to the same information here – but it's totally flexible how you manage that. I guess what it comes down to is that individual client circumstance. What's the most important? Is it managing the capital gains position or is it maintaining the asset allocation of that MPS?
[32:45]
Paul Richards: Yes, okay. And I'm going to come back to a point you made earlier Paul and that's about investment bonds. I don't want to get into a ‘bonds versus collectives’ debate here but this sounds quite complex and quite difficult to achieve in practice, so aren't I better just using a bond?
Paul Squirrell: Well, I'm not sure that anyone who's trying to sit through and do a calculation for a chargeable event would say that bonds are straightforward in their own right. But I think the point you make, Paul, and I think this is a valid point, is this is not bonds versus collectives, which is easier? It's about what's doing right for the client. We said it right at the top, it's about best outcomes for the client. And surely the best outcome for the client includes not subjecting the client to tax that they wouldn't necessarily be subject to. It's about thinking about the client's scenario. And I mentioned this before, but you start thinking about what tax rates you've got here to apply. Because it's sort of straightforward – if you've got a higher or additional rate taxpayer, a base rate or non-taxpayer holding the assets – where it's going to give you the best return? Of course, it's going to be over there and you're going to pay a lot less tax. So, think about how you can most efficiently hold investments first and then choose the wrapper that gives you the best outcome from the situation that you've got.
[34:07]
Jon Hale: I think you're talking about how the assets are held. We do still see a lot of General Investment Accounts held on a joint basis, and it's not always clear or obvious whether that's done for tax planning considerations or whether that's something the clients just like that feel of joint ownership. But one observation, more recently, we have started to see an increase in stock transfer activity separating jointly-held Investment Accounts into sole ownership.
Paul Richards: Okay, it's probably a stupid question, but why is that?
Paul Squirrell: Well, one of the benefits with capital gains, as Jon mentioned, this is a trend we've seen because, where you've got civil partners or spouses, assets can be transferred between them on what we call a no loss, no gain basis. In other words, it doesn't trigger an event, you can just move that across. And, in the main, it is good tax planning, if you think about it. Because, if I'm holding assets that are generating interest and dividends, holding them in a basic rate taxpayers name is obviously going to make obvious sense. But also, we do see movements between the asset classes, maybe for utilisation of a second capital gains allowance or something like that. So, also it's not about holding it all one way or all on the other way. Sometimes, because, as you say, Jon, the problem with a joint asset is, sort of, a 50/50 split. Hold them separately, could it be 90%, 10%? Does holding assets separately mean that we can utilise what we used to call back in the day ‘Bed and Spousing’, where you can sell funds and the other person buys the funds, etc? Hold them jointly, you lose the ability to do that.
[35:49]
Paul Richards: Now, Paul, I've heard you talk in the past about not snookering yourself in terms of making sure you've got assets that can be invested in these allowances. Can you just expand upon what you mean by that?
Paul Squirrell: Yes, it was alluded to earlier, these assets, if you think about the pensions and the ISA being the most valuable asset class – we're not trying to get into a ‘bonds versus collective’ debate – but dare I say there's a very simple process for a Bed and ISA from an Investment Account, moving the assets. It isn't always so easy where you may be using the bonds. As I say, I'm not saying you don't use bonds, but just think about that in terms of the accessibility of assets in order to continue using these allowances.
[36:34]
Paul Richards: Okay, understood. Thank you for that. And we’ve covered an awful lot today. And thank you both for joining us. But, before we finish, as ever, it’s always useful to summarise this and give our clients some key takeaways. So, I’m going to ask you both what are your top three tips, if you like, based on what we've covered today? So, if I can start with you, Paul?
Paul Squirrell: Yes, I'll give you my top three, but I'll probably elaborate on the bits. So, the first one is going to be allowances. And it's an obvious thing when I say allowances, but we talked there, Paul, about the pensions allowances and thinking about all of these clients that may have additional allowances. What about the high earners? What about those clients of fixed or enhanced protection? What about those clients who were over the lifetime allowance before? So, allowances generally and being able to continue to use them.
Paul Richards: I'm sorry to interrupt but remind me of those staggering numbers that you talked about?
Paul Squirrell: Yes. So, between a pension and ISA – and a couple – over a five-year period, anywhere between £236,000 and £800,000 worth of allowances. Huge amount of money and, of course, especially with the pension as we talk about the IHT favourable treatment of those – must use those allowances and continue to be able to use those allowances.
Beyond the pensions and ISAs, the next thing I would say is it's not bonds versus collectives, it's about how can you hold your clients’ assets in the most tax efficient manner. Is it better to hold them jointly? Maybe. But if they've got different tax rates, maybe not. Think about holding your assets to get the maximum return and the minimum tax to the client and where you are using collectives.
The final point would be about making sure that we're either using gains or allowances, that active management will increase your client’s overall return.
Paul Richards: So, that active management, again, is really key? Okay. Jon, if I can if I can turn to you and ask you for your top three takeaways from today?
Jon Hale: No surprise to hear me say that the first one is reporting. Take advantage of the reports we make available. Download them. There's lots of useful information to help you manage the tax year end considerations. But also, I touched on it at the start, those good outcomes under Consumer Duty. Plus, from a practical consideration, it can save you a load of time. I've touched on ISA contributions and identifying clients who've got unused allowance, lots of pension considerations, managing capital gains. So, my first tip would be to take advantage; use the reports because there's an extensive range available to you.
Second one, I would say is consider how fees are deducted from ISA and General Investment Accounts. Paul and I have touched on that today, there are other options. So, clients could be funding those separately to avoid money coming out of their ISA. And, I think, even if you or the client is not that keen to put additional money in, at least have that conversation and document that that is an option.
And I think the final point would be that cash comment you made earlier, there is a run to cash at the moment. Those who are running centralised investment propositions, just be aware that you can run multiple strategies. There's no limit to how many ISA accounts you can run on the platform. It does allow you to stay in control and run separate investment strategies for your clients.
Paul Richards: Okay, thank you. Well, that's all we have time for today. And all that remains is for me to thank Jon and Paul for joining us today, and to thank you all for your time and attention.
Finally, if you're looking for further information, please take a look at the tax year end planning hub on our website.
Thanks all and goodbye.
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