The hidden value in a financial review - Veterinary Practice
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The hidden value in a financial review

MARILYN MARTIN urges readers to review their investments and ensure their money is working hard for them

IN a bull market it is easy to selfselect a “performing” fund for your Pension and Individual Savings Account (ISA) investments. With the credit crunch impacting on all asset classes simultaneously, in a way not seen before, is it time to review your ISA and pension funds?

In my last article I explained the new tax regime and with that in mind the time is right to consider a financial review, as any change should trigger financial reflection. I have been assisted by John Nunn of PKF Financial Planning Ltd who has provided simple examples of where suchareview has been of benefit – this may strike a chord!

For example, once a pension provider has been chosen or an ISA manager selected, how many of us then even consider the possibility or opportunity to revisit that choice to identify if it is still the right one? Do we even know that we can switch providers without losing the tax advantages?

ISA review

Client A was introduced for a “general review”. He had never failed to utilise the full annual ISA allowance for his wife or himself since ISAs were first introduced by the Government in April 1999; by his own admission he “stuckapin in the FT” once a year, in March, to identify a fund that had been performing reasonably well, in an investment house that he was familiar with.

The primary goal, as he and his wife are higher rate taxpayers, was not to lose out on the tax-efficient annual ISA allowance. Over the years they had, between them, accumulated ISA investments with 11 different providers and invested in 47 different funds; by their own admission without a definite investment strategy.

At their meetings they described themselves as having a “low to medium” risk tolerance; however, under full analysis, each ISA portfolio was identified as being “medium to high” risk, due to the fund selections made over the years.

With full agreement from the clients, the portfolio has been restructured and re-balanced to fit within their preferred investment risk profile, on an investment platform, which has also cut the administrative burden of each portfolio considerably.

■ The ISA “wrapper” for the year in which the investment was originally made has been retained, which means that there has been no loss of ISA tax advantages.

■ Each portfolio also now benefits from an investment choice that suits their circumstances.

■ Recommendations to utilise each client’s 2008-09 ISA allowances were made, meaning further tax-efficient investment, but within risk tolerances.

■ Recommendations to gradually “wrap” an existing investment, currently held outside an ISA but performing well, into an ISA annually over the coming years within each client’s annual Capital Gains Tax Exemption, mean that the investment is retained but current annual income tax at 40% on the fund’s distribution will reduce and ultimately cease.

Pension review

Client B held a Stakeholder Pension Plan that he purchased through a friend. The plan was keenly priced but he had become disappointed with the performance of the underlying funds, even allowing for the general decline in markets and asset values.

The client described himself as a “busy man who often thought about his pension but who didn’t make time to formally review its performance or options for the future”.

He is a busy man but he had often thought about the issue and each time he received his twice-annual fund statement he resolved to make the time to seek advice but “never got round to it”.

A qualitative analysis of the underlying funds showed that they were performing regularly in the 3rd quartile of their sectors. The plan offered a limited internal fund choice, reflective of the low-priced stakeholder plan. He was also deeply concerned about being forced into a position where he would ultimately need to purchase an annuity with the fund when he draws the benefits at age 65.

Past performance is no guide to future performance of course, but with the limited fund choice on offer from the existing provider (within the client’s specific risk profile) and the concern about annuity purchase at retirement, an alternative strategy for the accumulated pension funds was identified as the way forward.

Self Invested Personal Pensions (SIPPs) have been heralded as the most flexible way for an individual to hold retirement monies and then to ultimately draw the benefits at retirement. There are additional costs involved but where the benefits that can be derived from these costs suit the individual’s circumstances, as was the case on this occasion, they should be considered.

As a result of the review of the client’s pension funds, the accumulated value was transferred to a SIPP and an investment manager has been engaged to create a portfolio that is bespoke to the needs of the client:

■ no loss of the tax advantages enjoyed by the pension fund;

■ the opportunity (no guarantees of course), through active management, for the retirement funds to outperform the internal funds offered by the existing provider for only a 0.5% increase in annual charge;

■ flexible retirement options via the SIPP including taking an income from the fund at retirement and delaying the purchase of an annuity whilst still enjoying the income required to maintain the required standard of living. Regular reviews essential A pension or ISA purchase is not a “once and for all” decision. Once the funds have been invested, then the wrapper (and associated tax breaks) should remain intact (until encashment or benefits are vested) but it is vital that the underlying funds and managers are reviewed regularly to maximise their performance over time.

■ Fund managers move on as in all walks of life – what will the impact be on the fund’s performance?

■ Particular assets behave differently in certain market conditions – what is happening to your fund?

■ Is the fund performing well within its sector or is the sector under pressure?

In the current economic climate, many of us do not have new money to invest but there is no reason why we shouldn’t make sure that the money we invested in the past is working as hard for us as possible.

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