As we continue to adapt to living and working with Covid-19 and come to terms with the restrictions placed on us, it is perhaps an opportunity to consider how we can support our clients to prepare for a more prosperous future.
It’s well documented that savings rates in 2020 increased as many people’s consumption fell as a result of the changes in how we all live our day-to-day lives. But how are we helping clients make the most of these savings?
For clients who have been fortunate enough to remain employed, their savings rates may have increased significantly. For instance, the person who commuted to work but has been working from home for much of the last year, will have potentially saved a huge amount on fuel, parking, bus and train fares etc.
And it’s likely that even as we transition out of Covid these savings, at least to some extent, will continue. Many of us may find that in the future we’re not travelling to the office as often as we did before as more employers and employees seek to retain a more flexible working pattern.
The latte factor
By way of example, if we take a client who, pre-Covid, was spending £15 a day on lunch and coffees when working at the office, if three of those days a week were to become permanent home working days in the future that’s a potential saving of £45 a week, £180 a month and £2,160 a year.
Suppose they were to invest this ‘saving’ into a pension then they would have an additional £540 added through basic tax relief making it an investment of £2,700per annum. And assuming they get a 5% net return for 10 years then they would accumulate just shy of £34,000 (assuming 5% net return, no advice fees).
If the client is a higher rate taxpayer they’ll receive an additional £540 per annum tax relief through the self-assessment over 10 years. That’s another £5,400. This simple idea is very compelling and this is just the saving made on lunch, what if they diverted some of those other more expensive costs to a pension? It could potentially make a considerable difference to their retirement.
We know that most savers in the UK are not utilising their full annual allowance for pension savings each year, so this accumulated cash creates a perfect opportunity for advisers to provide a better outcome for their clients by giving pension advice.
Now let’s consider a client who runs a business that’s had a good year. They may not initially be excited at the prospect of using some of their hard-earned profits to make a pension contribution but perhaps it’s all down to positioning here and a discussion about how they could pay less in tax may be more appealing. For these business-owner clients, the solution could be to extract their company profits more tax-efficiently via a pension.
Power of tax relief
Another simple idea to increase the appeal of pension contributions is the ‘wrapper swap’, which is a highly effective way to demonstrate the power of tax relief. Assuming there are not more immediate access needs, £8,000 moved from an ISA to a pension would be uplifted by 25%, to £10,000 and for a higher rate taxpayer 20%/£2,000 can be claimed back through their self-assessment. If the client is in the personal allowance tax trap of earning between £100,000 and £125,000 they would see their personal allowance restored and potentially get up to 60% tax relief. £10,000 invested in their pension having costed only £4,000.
In March 2020, literally days before we went into our first lockdown, the government increased the tapered annual allowance by £90,000, allowing many of the high earners previously restricted to the amount they could save into a pension suddenly being able to save more.
Sadly, many clients lost the opportunity to do this due to the unfortunate timing and unforeseen circumstances last year. However, with the assistance of good financial planning today there will be many others who will be able to take advantage of the increased tapered allowance by utilising the carry forward rules and investing some of their accumulated cash savings.
Every year advisers are busy towards the end of the tax year. This year, despite the pandemic, it should be no different and in fact could be even busier. Yes, we are still in a lockdown but if there is one thing that the advice sector has demonstrated in the last year it is how quickly advisers have adapted to using digital technology to engage with clients.
It’s definitely a time to be on the front foot with clients to demonstrate the full potential of any savings they might have made in 2020.
Colin Simmons is business development manager at Prudential UK