September 2007

Supporting the wrap

It is quite rare these days for financial advisers to have clients retiring on a final salary pension after completing forty years service with the same company. Much more common is the client who, for whatever reason, wishes to stagger his retirement. This may be due to the fact that he cannot afford to retire completely because his pension is not going to be as much as he had hoped, and expected, only a few years ago. Alternatively, of course, the client may wish to carry on working but not necessarily five days a week.

In circumstances where the client is reducing their working time, the first thing the adviser will want to know is how much lost salary the client is seeking to replace. Once that is established and the adviser is satisfied that the portfolio of investments will support this amount then the next question is, "Is this the gross figure or net of tax and on what day of the month do you wish to see this in your current account?"

The adviser will go on to say that the client can be assured that the money will be there alongside his reduced salary payment. How that money is raised is the task of the financial planner and part of the investment and tax planning advice that is offered.

It may be underpinned by some form of drawdown from the pension arrangement but it might equally come from accumulated withdrawal allowances built up in investment bonds, switching investments from growth to income generation in PEPs, ISAs or direct holdings of other collectives. An adviser may well wish to utilise the CGT allowances as a tax efficient way of generating the monthly payments. Finally there is the option of equity release in the case of older clients where this is deemed appropriate. Now none of this is ground breaking but what has happened with the advent of a full tax wrapper service is that it has become more manageable. In fact, some advisers will tell you that it was almost impossible to offer the full extent of this service until, and unless, all the assets were held on one platform. This is at the heart of integrated financial planning.

Benefits of wrap

Using a wrap platform, it is a simple matter to raise cash in the most appropriate way, as and when required. The flow of income can be increased or decreased very easily at any time. In addition to the extra income that the adviser might have generated by switching from growth to income funds, the adviser is able to complement this by the encashment of certain assets. The cash is then transferred to a deposit account where, until it is needed, it earns interest at a competitive rate. Not only is it essential to have all the assets in one place, with up to the minute valuations accessible at the press of a button, but it also requires the wrap service to offer a CGT calculator to establish the current position on both unrealised or realised gains or losses. For this to work, it is obviously necessary for the adviser to ensure that the correct original cost details are entered on the system. Of course, where the assets were purchased subsequent to the client joining the platform all the details on these investments will be held by the wrap service provider. Either way it is only necessary for this information to be captured once.

Each adviser will have his or her own views as to how the needs of the client are best served and the use of assets as described above is only one example. What is beyond dispute is the ease with which it is possible to look at the whole portfolio in one place, ensure that the CGT position is recorded accurately and then deal with one counterparty to put the plan into action. We are told by various advisers who practice this form of income planning that their clients are delighted with the service particularly since they can follow each step themselves by going online. Transparency is a key factor in making the client feel comfortable.

Advisers who use a pure wrap service are paid by their clients. This usually takes the form of an ad valorem fee/remuneration where the provider is instructed by the client to take cash from deposits held on the platform and pay this amount to the adviser on the basis agreed between them. The same system operates where the fee is calculated on a time/cost basis. The income generation exercise that we describe above means that the client is only too happy to pay for such advice. This goes hand in hand with commensurate investment advice that seeks to ensure that the portfolio will continue to support the income required throughout the life of both spouses.

Malcolm Murray
Head of Marketing
Transact