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Financial times

technical & practice

Individuals need to appraise their finances in order to make the most of tax and investment efficiencies Economic uncertainty, conflict in the Gulf and a delayed

Budget meant that this year many partners in practices deferred reviewing their annual pre-tax year-end financial planning.

Now is the time to revisit your financial affairs, since the chancellor's recent Budget was a non-event and the war - we are led to believe - is over. But there is no need to wait another 10 months until the end of this tax year to effect some proper financial planning.

Many financial decisions could be taken with less stress if partners approached their personal affairs in the same way as their firm's financial management, ie, with a clear and focused plan which is adopted methodically and reviewed regularly.

Financial decisions made in haste can have far-reaching and long-term consequences - so do not be trapped by the tax deadlines. The importance of these decisions warrants proper care and attention. So what could you be doing to take maximum advantage of financial planning opportunities?

Despite all the negative press and industry scandals, parts of the pensions industry have changed for the better.

Flexible control

Self Invested Personal Pensions (SIPPs) and 'wrapper' accounts have continued to develop. They do have higher charges but provide flexibility, control and choice for individual partners' pensions, particularly in the crucial aspect of the underlying investments.

SIPPs may invest in a wide variety of assets, including individual quoted shares, collective investment funds, gilts, cash deposits or even commercial property. With a 'wrapper', the pension provider does not undertake the investment management in the traditional sense, but instead outsources to a range of external fund managers, usually with the opportunity to switch between managers and funds without further charge.

This added flexibility allows you to take complete control over how your fund is invested, instead of relying on insurance companies. If you decide to sit out the equity market, you can hold your fund in a range of cash or fixed-interest funds and gradually drip feed into equity-based funds over time. The key is to determine the overall strategy, plan carefully and review the plan regularly to ensure it remains on target.

Furthermore, the proposals spelt out in the recent Green Paper set the tone for the prospect of a more flexible and comprehensible regime, although only from April 2004 at the earliest. In our view, pensions should form a significant part of a partner's retirement and tax planning, but by no means be the only focus. So what else should be considered?

Tax relief

ISAs, and their tax efficiency, should not be ignored.Again, consider using a 'wrapper' service that allows you access to a wide range of funds and investment managers. The same investment strategy can then run through your entire portfolio, whether the product is a pension, an ISA or some other product.

Building up an ISA portfolio can be extremely useful as a supplement to income in retirement - and remember that all withdrawals are tax free. Don't be afraid to spend the ISA money if you need to, since the major benefit compared with pensions is that you can access the money before the age of 50. Also, from a tax point of view, the ISA portfolio will form part of your estate for Inheritance Tax purposes on death. So part of your taxplanning strategy should be to spend before the end.

For those brave enough to invest in higher risk ventures, a measure of tax relief is available. Venture Capital Trust and Enterprise Investment Schemes (EIS) offer 20 per cent income tax relief on investments plus 40 per cent Capital Gains Tax (CGT) deferral for those lucky enough to have any capital gains to shelter. A simpler way to mitigate modest CGT would be to utilise fully the annual CGT exemption, which everyone has and is set at £7,700 for the current year. Transfers between spouses of existing assets are also exempt so an idea could be to transfer assets before sale, which would allow a married couple to realise gains of over £30,000 without creating a CGT liability.

Finally, don't forget to consider paying off debt, particularly those loans without tax relief. Repaying part of a mortgage may well produce twice the 'return' of holding surplus cash funds at a bank and suffering tax on the interest income. Increasingly banks are offering combined accounts and automatic offset arrangements to help effect this.

So, the message is clear - there are plenty of ways to save tax and take advantage of the 'generous' UK system. But the planning fundamentals should never be forgotten - clearly define your objectives, use efficient structures and review your investments regularly against a predetermined benchmark.

Louis Baker is head of the Professional Practices Group and a tax partner, and Ken Stewart is financial planning manager at Horwath Clark Whitehill.

Email louis. baker@horwath. co. uk or ken. stewart@horwath. co. uk

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