Tax is an emotive subject – no client wants to see more of their cash than is absolutely necessary end up in chancellor Philip Hammond’s coffers.
But given how tax-efficient wrappers are constantly tinkered with by successive governments, what role should they play in financial advisers’ investment recommendations?
During a panel discussion at a recent FTAdviser masterclass on tax-efficient investing, Alex Foster, a partner at RSM UK, said: “I think it is important but should not be a main focus. For myself it is very much about the client being aware of various outcomes from the outset so there aren’t any nasty tax surprises.”
She added: “It is not so much that tax should drive the investment but it should very much be part of the initial discussion.”
But a member of the audience challenged the panel’s view that investments should not be driven by tax.
- Tax should form part of an initial adviser/client discussion to avoid nasty surprises.
- It is important to diversify tax wrappers, such as using Isas as well as pensions.
- The government may tinker with tax reliefs.
He said: “I am a bit surprised that you downplay tax in investing. If you said to somebody on the street there is an investment where, for certain people, if they invest in it on day one, it does not go up by 1.5 per cent a year, but goes up by 66.66 per cent – it goes into a fund that will pay no tax for the rest of its life... they would rush to make the investment.”
Panellist Ian Dyall, technical manager and head of estate planning at Tilney Financial Planning, explained: “From an advisory angle and from an estate-planning perspective, you can talk purely about inheritance tax, but that is not what is going to motivate people to take actions.”
Isas versus pensions
The panel, which discussed ‘Where does tax fit in investment choice?’, also touched on the topic of diversifying tax wrappers by having a combination of tax-efficient investments in a portfolio, primarily Isas, rather than relying solely on pensions.
Mr Dyall said: “If you are trying to make the most of your income tax allowances, your savings allowances, dividend allowances etc, you need all the investments to take advantage of the tax wrappers.”
He suggested: “One of the big advantages that Isas have over pensions is flexibility. For somebody of my age – and I have been through several phases where my job has been kind of dicey over the last few years, companies have been bought, etc – having a great amount of money in pensions, obviously the tax-efficient investment that it is, doesn’t help me.”
John Barnett, partner at Burges Salmon agreed: “At a macro level, Isas are a more honest tax relief because you get taxed this year, and you get the tax relief year-on-year and each government can make a decision year-on-year.”
The fact that Isas have more flexibility and provide immediate access to cash was pointed out by several of the panellists, who compared this to pensions, which only allow savers to access the cash at a certain age.