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Holistic advice and planning

I have written many articles on specific topics concerning Pensions, ISAs, Investments, Inheritance Tax, Life Assurance and other Financial Services products, but how do you bring all the various aspects of these products together to ensure you are maximising returns and minimising tax?

Let’s look at the example of a retired couple, Mr & Mrs Client, who now need to draw on their pensions for income. Drawing their pensions is a “single” issue but by looking at their entire situation, financial advice can really add value. In addition to their pensions they have £500,000 in a mix of savings accounts and cash ISAs. Mr & Mrs Client have received Annuity figures from their pension provider indicating that Mr Client could receive £12,000 per annum and Mrs Client £5,000.

With interest rates at historic and long lasting lows, they are aware that they need to take some degree of investment risk to generate returns for their retirement income. Our clients have no requirements for their Pensions to provide a lump sum.

For our example I have assumed that over the long term the clients achieve investment returns in a ‘moderate’ risk portfolio of 4% pa and that they don’t want to purchase an Annuity with their pension funds due to the new Pension ‘Freedoms’. His State pension is £3,000 below his Income Tax allowance, and his wife’s is £6,000 below it. So combined they are able to take the opportunity to exploit the new Flexible Pension rules and take pension withdrawals from the ‘taxable’ part of their Pensions of up to £9,000 pa between them (their combined remaining Income Tax allowances) and with no requirement for a lump sum, they would also receive the ‘tax free cash’ part of their pension funds (25% of the fund) as part of their monthly income providing a further £3,000 pa without any tax liability (effectively £12,000 per annum free of Income Tax).

We can then look at their ISA funds. These are all in Cash ISAs and delivering virtually zero returns (acknowledging there is no investment risk to the capital). If transferred to an investment ISA held on the platform, we can use some of the investment returns to pay a monthly, tax free ‘income’. They held over £150,000 in ISAs so we recommended withdrawals at 3% per annum to give some protection against investment fluctuations and inflation. This gave another £4,500 per annum, again with no income tax.

Their Cash deposits are also generating a near zero return. We used these to maximise their investment ISA allowance of a combined £30,480 for this year to generate a further £914 per annum of tax free withdrawals. After allowing for emergency Cash ‘contingency’ funds of £30,000 in Premium Bonds, invested the balance into a ‘Unit Trust’ portfolio. The clients each have an unused Capital Gains tax allowance of £11,000 per annum, and a tax free ‘Dividend Income’ allowance of £5000 per annum. By using these allowances via the Unit Trust portfolio we can pay further tax free withdrawals on a monthly basis as income to the clients. To avoid the possibility of Capital Gains or Dividend tax allowances being exceeded we limited the Unit Trust investment to £200,000 and take withdrawals again at 3% or £6000 per annum.

The investment platform we use permits a further investment product to be utilised in the form of a Life Assurance ‘Bond’. These have their own peculiar tax treatment, which whilst too lengthy to describe here, essentially allows another source of tax ‘deferred income’, and if held in a special Offshore Trust can be very effective at mitigating Inheritance Tax. In this case, £150,000 generates £4,500 per annum.

This creates a total ‘income’ stream of £43,5000 per annum without any Income Tax! Of course, the investment returns need to at least equal to the withdrawals to maintain capital values, but in our view, this is achievable (although not guaranteed) without taking high levels of investment risk. Tax rates will change and the investment climate may change, but because all of these plans are held on one platform, managing income or investment switches is highly automated and simple. Consolidated reports and tax statements are all produced for simplicity.

By using this holistic advice approach to investing you really stay in control of your assets and maximise as many tax free opportunities as possible and with a sensible choice of investments you should be able to generate the return needed to protect your capital from the erosion, it will certainly suffer if left in Cash deposits. By only drawing sensible levels of ‘income’, you will have the potential to grow the Capital, protect against inflation and potentially grow your income through the years if required. All the underlying investments we use are ‘liquid’, can be readily traded or sold and are made via UK regulated products. As well as maximising legitimate tax allowances the Pensions and Offshore Bond will also benefit from preferential treatment for Inheritance Tax. We can provide advice on all aspects of such an arrangement and have a long track record of successfully managing retirement portfolios in this way.

Whilst the figures in this example may not apply to you, the concept does, and we would be happy to look at any size portfolio to see how we may be able to help maximise your retirement income.