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Why the need for multiple tax wrappers for income?

Alastair Black, head of Financial Planning Propositions, Adviser & Wealth Management Propositions – Standard Life, looks at how an adviser might best organise a client’s retirement and taxation affairs when utilising a platform 

In this article I want to look at how an adviser might best organise a client’s retirement and taxation affairs when utilising a platform and its associated wrappers, tools and functionality. This will consider the planning strategy but also take into account the creation of process efficiencies.

Why savings aren’t only for Christmas

Since pension freedoms everyone I speak to about their pension has become excited about what they’ll do in retirement and how they’ll spend their pension fund more flexibly. And whilst it’s great that more people are engaging in their pension, many still don’t think of it as being part of their broader savings: they have been so used to compartmentalising that they see their pension as the only source of their regular retirement income, whilst their other savings remain ring-fenced to pay for the larger expenses of life such as holidays, Christmas, a new car or simply to be kept aside in case of that ‘rainy day’.

But one of the huge advantages of pension freedoms is that it unshackles this traditional thinking. Gone are the old rules and restrictions limiting how much you can withdraw from a pension, and instead pensions have pretty much equal footing in terms of accessibility from retirement age as with the other savings you’ve built-up.

For advisers the great news is that because each type of saving has different tax treatments governing withdrawals or investment returns, this creates advice opportunities that demonstrate real value to clients, by making use of the different allowances to optimise tax efficiency in income paid to clients.The AKG research calls out that advisers have really engaged with this (although there is still sometimes a challenge in persuading clients the world has been turned on its head).

Such financial planning advice can lead to £1000s of tax savings a year. For example, let’s imagine a client aged 60 is retiring, needing £25,000 per year income and has a £500,000 pension, a £150,000 ISA and £50,000 in a bank savings account.

The traditional solution would be to take £125,000 tax free cash, which they’d probably save – in a taxable savings account, whilst making this liable to Inheritance Tax too as part of their estate. Drawing a regular income from their pension will lead to tax. They don’t need to pay this. By drawing income across all of their savings they can avoid paying any tax at all. This simply involves keeping Tax Free Cash within the product and using that for income along with drawing regular income from other non-pension products. Doing this can save £1000s in tax demonstrating the value of advice.

So how can advisers make this practical?

First, they will need to get an efficient way of managing investments consistently across multiple tax wrappers and coordinating income from lots of different products and providers. Platforms can help to do this. While they were originally designed for investment efficiency, the range of tax-wrappers allows this efficiency to be extended across other functions such as ongoing reporting and withdrawal functionality.

Next, they will need a scalable and repeatable way of calculating the tax, to find the optimum combination specific to each client, based on their available saving pots and individual income needs and circumstances. Once again platforms often help with tax calculations.

Standard Life provides an Income Withdrawal Optimiser tool which performs the key tax calculations, such as income tax and capital gains tax at the touch of a button.  This stores the tax-allowances such as nil-rate income tax band, savings rate allowance and dividend allowance, so that advisers can quickly and easily test out different combinations of which tax wrappers to target for income, before making a recommendation to their client. By doing this, the adviser can also calculate what tax would have been paid, had the client chosen to solely target their pension for income, and show the tax saved by using a multi-wrapper income solution: which in turn translates into a £-value benefit of advice to the client.

So, in conclusion:

• Consumers need to be encouraged to think outside the box and view their pension alongside their other savings when thinking about drawing income in retirement

• Advisers can demonstrate real value of advice by facilitating multi-wrapper withdrawal strategies that optimise tax-efficiency of income

• Using a platform will help the adviser deliver more efficient and effective customer outcomes where multiple tax-wrappers are being used to generate income in retirement.

Previously published in the AKG Pensions Freedoms 2018 paper

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