Increasingly the financial and popular press focuses on the cost of advice. But whenever you buy anything, tangible or intangible, there are two parts to the bargain - the price paid and the value received. And it’s within the gift of the adviser to turn the focus away from cost and towards value.
There is little doubt that over time engagement with an experienced financial adviser delivers both financial benefit that exceeds the cost. Detailed studies carried out by (amongst others) Vanguard and Morningstar, show that around 1.8-3% per annum after advice charges can be added to returns through financial advice.
The mere act of engaging with ones finances (as opposed to remaining passive) contributes materially. Behavioural coaching (“standing between the client and stupid”) especially in times of volatility, asset allocation, smart asset location and drawdown choices all contribute to the additional return through engagement with an informed financial adviser.
And let’s not forget the non- financial benefits of advice - fundamentally the “peace of mind” that goes with knowing that you have a financial plan and you are with experienced help, working to that plan. That this is a very real benefit has been well proved in recent detailed consumer research carried out by ILC on behalf of St. James’s Place.
Delivering and proving the value of financial advice is very important to the long-term sustainability of the adviser-client relationship. So called “softer” but actually fundamentally crucial relationship skills which incorporate low self-orientation (complete client focus) and intimacy (likeability) are an essential contributor to the desired outcome. But there’s also a strong contribution to be played by the adviser’s contextual knowledge and specific know-how.
What do we mean by this? Well, basically being able to confidently and reliably do three things:
1. Respond to a wide range of questions that your client might reasonably ask – even if they are not directly to do with your “everyday” or core knowledge base.
2. Be proactive. Recognise a development, opportunity or challenge that is relevant to your client and then reaching out to them to tell them about it on a kind of “Saw this and thought of you” basis. So, so powerful.
3. Develop and execute the specific solutions or refinements that first create the financial plan and then keep the financial plan on track.
It’s in this combination of soft and hard skills that the true and memorable value is delivered. Especially these days with so much tax change expected and with tax so regularly mentioned in conversations about financial planning, the requirement of advisers to stay on top of, and ideally ahead of tax changes that have an impact on financial planning strategy has never been so important.
The (first) Budget of 2021 and so called “Tax Day” on the 23rd March didn’t deliver huge change but the changes, proposal and direction of travel indicated was not without relevance. And let’s not forget we have another budget to come this autumn.
Essential facts for keeping your contextual knowledge sharp and where it should be from the Budget and Tax Day are these. We have (somewhat arbitrarily) selected four announcements from the Budget and three from Tax Day for financial advisers to be aware of and why:
The addition of £70 to the personal allowance and £200 increase in the basic rate band, in line with indexation requirements. However, after 2021/22, the personal allowance and higher rate threshold (outside of Scotland) will be frozen for four tax years.
Why: No change now but by the end of 2025/6 one in six taxpayers will be higher or additional rate taxpayers. All of the currently known ways of smartly and tax efficiently investing (ISAs, pensions, collectives, investment bonds) all remain.
The inheritance tax (IHT) nil rate band, the pensions lifetime allowance and the capital gains tax annual exemption will all be frozen at their current levels for the next five tax years.
Why: It seems that IHT is the tax most disliked by the UK public and the frozen nil rate bands will ensure that more will be subject to it. Inheritance tax reduction and provision will represent an important part of a successful intergenerational wealth transfer strategy.
For companies with profits of over £250,000, in April 2023 the rate of corporation tax will jump by 6% to 25%. A new smaller companies’ rate of 19% for companies with profits of up to £50,000 will be introduced at the same time.
Why: Delivering financial advice to the owner managers of Small and Medium Enterprises (SMEs) is critically important. If there is to be fundamental change to corporate taxation you have to be in top of it. Corporate tax changes will have an impact on remuneration strategy (dividends or salary) and an increase in the corporate tax rate will increase the value of corporate tax efficiency e.g. of pension contributions.
A new ‘super-deduction’ 130% first year allowance will be introduced for companies investing in plant and machinery between 1st April 2021 and 31st March 2023.
Why: Knowing at least the fundamentals of any important (and especially new) corporate tax relief is essential “currency” for any adviser seeking to create trust with SME owner clients and professional connections.
The Office of Tax Simplification (OTS) published two reports on IHT. The first covered administrative issues in 2018, and the second covered tax itself in 2019.
Following the first OTS report, the Government announced that from 1st January 2022 return procedures will be simplified so that “over 90% of non-taxpaying estates” will no longer have to complete IHT forms when probate or confirmation is required. Based on data in the OTS reports, that will mean about 225,000 fewer IHT forms being completed each year. Where estate and trust returns are needed, the current easement that removes a requirement for signatures will be made permanent.
The Chancellor added that he has asked his officials to continue work on the remaining recommendations: for digitisation, improving processes for lifetime and trust charges, guidance, and working with court services. Some of these are longer term in nature and will be taken forward as part of the wider tax administration strategy.
The Government said it will respond to the many simplification recommendations made in the second OTS IHT report (such as replacing the multiplicity of lifetime gift exemptions with a single personal gift allowance) “in due course.”
Of course, as we have said above, the Government already announced in the March 2021 Budget that the nil rate band and residence nil rate band will be frozen at £325,000 and £175,000 until 5th April 2026.
In November 2018 (two Chancellors ago), a consultation paper on the taxation of trusts was issued. Tax Day produced a long-delayed list of responses together with a statement. The Government simply said “The responses did not indicate a desire for comprehensive reform of trusts at this stage. The government will keep the issues raised under review.”
Capital gains tax
There was no further news on capital gains tax (CGT). Last summer the Chancellor asked the OTS to carry out a review to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’. Based on the first report published by the OTS on 11th November 2020, it was thought that the Government might look to introduce proposals, such as taxing capital gains at the same rates as income and reducing the annual exempt amount. Of course, as we have said above, the Government already announced in the March 2021 Budget that the annual capital gains tax exemption will be frozen at £12,300 until 5th April 2026.
In the end ‘Tax Day’ was fairly uneventful and any major tax changes to address the income side of the Government’s finances, other than those already announced in the 3rd March Budget, appear to have been put on the back burner again. The absentees – CGT, pension tax relief, IHT structure – were as notable as the attendees on Tax Day. They could well make their appearance come the autumn Budget.
Given this background, the commencement of the new tax year and the relative (albeit possibly temporary) period of “calm and stability” - at least until the next Budget, financial planners should take this opportunity with their clients to review their financial goals and ensure that they are maximising the use of the available allowances exemptions and opportunities for tax effective investment. Outcomes will always be optimised through planning implemented at the beginning of a tax year rather than at the last minute.
Recent consumer research Sanlam carried out indicates that there is a real appetite for investors to be informed about tax saving opportunities open to them – and especially those that they may not be aware of.
One of these is undoubtedly the too often overlooked tax deferment and tax-saving qualities of an onshore investment bond. Once you have used the obvious allowances and exemptions attached to pensions, ISAs and unwrapped collective investments (leaving aside the tax reliefs, together with greater risk and potential liquidity challenges that go with EIS and VCT investments), the combined value of lower tax on UK life funds (dividends received in the fund are entirely tax free without limit), simple tax administration and the opportunity to manage tax attractive access to invested funds through the 5% allowances and potentially powerful top-slicing relief, can represent a surprisingly powerful “revelation” to many clients.
In summary, the potential to add and prove value to clients through your contextual knowledge and specific know-how is abundant and very, very real.
Sanlam is a trading name of Sanlam Private Investments (UK) Limited (registered in England and Wales 2041819; registered office: 24 Monument Street London EC3R 8AJ). Authorised and regulated by the Financial Conduct Authority. The value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.