Rather than ponder unknowns this week we open the bonnet of the financial planning car and look at the chassis and engine. The investment assets you add are what will power your car, but no matter what grades of fuel you use your driving experience will ultimately be determined by the build quality of your vehicle. 

We are often asked why one Wrapper performs better than another, and hopefully a brief explanation will help. For the purposes of the exercise we shall concentrate on the three main wrapper types we deploy in well over 90% of your planning affairs; namely Pension, ISA and General Wrappers (Onshore and Offshore Bond, KB’s Income Control Account and other special Wrappers are different cases entirely).

Matching Wrapper selection to individual Client needs (insofar as pre-existing arrangements allow) is our starting point. The asset allocation process follows, selecting first asset sectors, then asset types, and lastly the individual assets that will best combine to do the job. Umpteen considerations feed in to the final mix, but one constant at every single stage of the process is a heavy focus on tax. 

The three taxes we are predominantly concerned with are income tax, capital gains tax (on Clients themselves; on the wrappers, and on the underlying assets) and inheritance tax. Corporation tax (insofar as it impacts on individual asset types and the wrappers in which they are held) and stamp duty are amongst many other taxes we factor in to deliberations, but we shall concentrate on the “big three”. 

Dividends are paid net of (non-reclaimable) tax at source, so for income tax purposes it makes no difference which wrapper you hold shares in unless you are (or might become) a higher rate taxpayer. In this case we focus equity holdings on Pension and ISA Wrappers to avoid an additional 22.5% or 32.5% marginal rate of tax on income (whether accumulated or not) to enhance bottom line net returns. 

Interest is tax-free in Pension and ISA Wrappers, holding cash in which will avoid 20% tax at source (and 20% or 30% extra to higher rate taxpayers). But income from bonds (sovereign, corporate and some others) rolls up gross in Pension and ISA Wrappers, so taxpayers will save 20%, 40% or 50%. On a Bond Fund yielding 7% pa this enhances returns by no less than 1.4%, 2.8% or 3.5% pa. 

Pensions and ISAs are exempt from capital gains tax. This does not necessarily militate against General Wrappers, since CGT is manageable within all but larger portfolios. Pensions are exempt from inheritance tax but suffer special tax charges of 0% or 55% (most folk) on death, so good planning can make a huge difference. ISAs allow no IHT protection, but General Wrappers can be shielded by KB Trusts. 

So there are no “good” or “bad” Wrappers; disparities are down to how assets are spread across them. Our portfolios are designed to be “self-adjusting” so downturns in some asset classes will be offset by strength in others to deliver long term growth with a “smoothing” effect. If (current) stronger assets are concentrated in any single Wrapper it will shine (for a while) but the aggregate planning effect will be the same. 

Finally, an example of what happens if you do not get basics right. Tesco shares dived this week, and now yield around 4.5% pa net. Despite hiccups we wonder if the shares are not better value on a risk-adjusted basis than bank deposits. We are not advocating buying them, but rather musing that shares being possibly the safest bet for income-starved grannies shows just how crazy the world has become. 

Staying with Tesco and financial planning, we query how they are helping us spend less every day when our food bills keep rising. However, another of their slogans lies at the heart of everything we do. Now, more than ever, every little helps.