1) Meeting objectives – Improve the tax-efficiency of her current financial arrangements

Question 1

Recommend and justify the actions that Andrea could take immediately to improve the tax efficiency of her existing financial arrangements. (17 points)

Answer 1

Rec:
* Make additional pension contributions

Just:
* 40% tax relief on contributions
* Preserves £1,000 PSA if reduces earnings to basic rate
* Tax free income and growth within fund/IHT efficient
* 25% PCLS
* More tax efficient than other investments
* Can be drawn tax free if dies prior to age 75.

Rec:
* Reduce cash holdings/consider NS&I premium bonds/cash ISAs

Just:
* Cash holdings are not tax efficient/deposit account likely to be generating taxable interest (at 40%).
* Cash ISAs and NS&I premium bonds are tax free.
* ISA allowances may not yet have been used/lost if not done by the end of the tax year.
* S&S ISAs, no tax on income or growth/adds diversification/can ensure portfolio matches ATR.

Rec:
* Switch ISA funds to fixed interest and property.
* Switch OEIC funds to equity growth funds (whilst higher rate taxpayer)
* Bed and ISA individual shares

Just:
* Income from fixed interest in OEIC will be liable to tax at 40%. (PSA being used by cash holdings)
* Equity funds produce dividends rather than interest/taxed at 33.75%/growth funds produce lower dividend yield.

Question 2

Explain why pension and ISA contributions should be used by Andrea to maximise the tax efficiency of her portfolio. (9 points)

Answer 2

Pension contributions
* Receive tax relief at highest marginal rate.
* Can contribute up to 100% of relevant UK earnings.
* Tax free income/gains/increased growth.
* PCLS/potential to reinvest this into ISA.
* Outside of estate for IHT.
* Tax free to children on death pre-75.

ISAs
* Tax free income/growth.
* Can contribute £20,000 per annum.
* Can bed and ISA shares and OEIC.