This article is for professional investors only, and not intended for retail investors.

First published: FT Adviser

As we begin a new year, we should reflect on the short-term impact the pandemic has had on investors and what we can learn to take forward.

For advisers and wealth managers that are planning for their clients’ retirements and later lives, there are some new, and some not so new, challenges to face up to. Later life planning has become more topical than ever and advisers and wealth managers need to absorb the seismic changes we have just witnessed if they are to be in a position to modify their propositions and meet their clients’ needs in the new world.

The search for income

Maintaining a reasonable level of income in retirement has been the key to allowing people to pay for life’s needs for generations. Whilst this is not a new challenge, securing a reasonable level of income in the current environment, without taking on unpalatable levels of risk, requires renewed thinking.

The combination of economic pressures brought about by COVID-19, Brexit uncertainty and ongoing geopolitical insecurities has made the search for income from traditional assets harder and harder. Annuity rates, interest rates and fixed income yields are all at notable lows and dividends from listed shares are disappointing on a historic basis. Whilst taking some growth from an equity portfolio could offer better returns, the level of volatility and the risk of drawdowns associated with these investments makes many investors understandably nervous. In addition, these investments are all listed and therefore exposed to market uncertainty and investor sentiment, which has been swinging wildly over the last few years. Increasingly, wealth managers are turning to areas that avoid this but offer the opportunity for significantly improved growth or income prospects, such as unlisted or private investments.

The threat of tax rises

With government borrowing already sharply up and the potential for long-term lingering economic effects from COVID-19, speculation about tax rises is mounting. The Treasury has a whole armoury of potential policy responses available to it, monetary as well as fiscal, so tax rises are definitely not certain, but they are possible. If we assume for a moment that some areas of taxation will harden, then the question to ask is where? And of course, two areas of legislation that always come up for discussion that are directly relevant to later life and estate planning are Inheritance Tax (IHT) and Business Relief (BR).

The Treasury normally follows a process before considering tax changes, firstly reviewing the policy, its costs and effectiveness, before then making any specific recommendations. Conveniently, the Treasury commissioned the National Audit Office (NAO) to look at the impact of general tax relief policy and published their findings in February this year1. The report categorises the c.1,200 current tax reliefs available. Two thirds are structural reliefs and apply to all people, or companies, such as income tax bands. The other third are non-structural reliefs (or ‘tax expenditures’) and are designed to promote or support certain sectors or specific agendas. Tax expenditures cost the government a total of £155bn in 2018/19. In the NAO’s report, all tax expenditures were assessed to establish both how much each area costs the government and how effective they appear to be at achieving their intended outcome.

Logically, one could deduce that any tax relief that is identified as being of high cost but producing little positive effect would be the obvious place for HM Treasury to direct further scrutiny. The reassuring news is that both IHT and BR do not feature particularly prominently. In the area of IHT policy, the top relief is the current exemption on inter-spousal transfers on death, which itself only comes in at number 20 on the list of top costing reliefs (at £1.9bn), way behind the exemption from CGT on the disposal of a primary residence, for instance, at £26.7bn. Indeed, in the area of IHT, tax expenditures have actually fallen significantly over the last five years, so are probably of less concern. On this basis, even if we were to have sweeping changes to fiscal policy, the government might be minded not to start in this area.

However, after a year of unprecedented events and with no existing rule book for recovering from a deficit of this scale, no one can predict what the future holds. That is why leaving clients flexibly positioned to deal with any future changes by not making any irreversible decisions, is a maxim worth remembering.

A renewed focus on health and well-being

The arrival of the pandemic brought with it an immediate focus on the nation’s health and mortality. In the peak of lockdown, demand for will writing increased by 75%2, indicating a sense of ‘panic planning’ from those who might not have previously considered later life planning as something that was a priority to them. There was also an increased focus on the UK’s long-term care system, its strengths and weaknesses and how fundamentally important good care is to quality of life for so many of the population. We hope that this spotlight will drive continued positive planning behaviour in this area and wealth managers realise they can play a crucial role. The later life planning services advisers are advocating should encompass clients’ investment needs, their tax-efficiency but also well-being enhancements, such as having access to independent, specialist care advice.

The great wealth transfer 

Another challenge that has gained pace over the last year is the intergenerational transfer of wealth. £5.5tn is expected to change hands by 20553, and sadly this has accelerated due to the number of additional deaths recorded in 2020. Whilst there is the initial planning requirement to help your clients manage the transfer of their wealth in a tax-efficient manner, so up to 40% of the clients’ assets aren’t lost on transfer, there is another additional challenge that wealth managers need to face up to. That is the reluctance of the next generation to use a professional financial planner in favour of apps and other digital platforms, as they have yet to fully understand the value that these professionals can bring.

However, later life planning can provide an invaluable opportunity for wealth managers to engage with the wider family and demonstrate that value. Investors should be encouraged to discuss their financial plans with their beneficiaries and in turn, this exposes the invaluable work of the financial adviser. This conversation might even open the door for wealth managers to meet directly with beneficiaries, discuss the planning in place and offer some options for future wealth management.

Planning for well-being and care can provide a similar opportunity. Any care advisory service put in place by the wealth manager should be discussed with the wider family, making them aware of the provision, especially in times of crisis or diminishing responsibility.

Through these simple steps, all advisers can improve on their chances of retaining clients at such a vital time.

Finding a solution

Having considered the shifts we have noted in 2020, what are the crucial elements to later life planning?

First, all advisers should focus on the client’s intended outcome. This will normally be to preserve their wealth and enable it to steadily grow, whilst retaining optimum flexibility in case their life circumstances change – for instance long-term care. This means that any investment solution will need to produce a meaningful long-term real return after charges and volatility should be mitigated as a priority, as in the decumulation phase of clients’ lives it is a corrosive force to both their portfolio values and their well-being.

Many clients may also then want to consider engaging in estate planning, ensuring the maximum amount goes from their estates to their chosen beneficiaries. There are two major factors that need to be considered with all estate plans. Firstly, how can we deliver the largest estate before, or on, the death of the client. Secondly, how can we minimise any losses arising due to the death of the client, specifically from IHT.

There are several techniques employed to achieve these outcomes and all must be assessed against both criteria. An outright gifting strategy for instance will attempt to be fully IHT effective after seven years, but will not promote any further growth. By contrast, a life insurance policy may deliver a large lump sum on the death of the client, but it doesn’t actually reduce their IHT liability, it typically just pays for it. Also, both these techniques offer little flexibility and are effectively irreversible strategies.

By contrast, BR-qualifying investments can reduce the impact of IHT to zero after two years, whilst also allowing the potential for consistent growth. For instance, Ingenious Estate Planning Private Real Estate targets long-term growth of 5-7% per annum from an unlisted investment. Investors stay in control of their money and insurance can be taken out to cover the value of IHT that would be payable on the investment if the investor dies before the two-year qualifying period. The service also comes with complimentary access to a care advisory service.

Comprehensive later life planning is more important than ever

2020 has brought several challenges faced by later life planners into sharp focus. 2021 should herald an opportunity for wealth managers to scrutinise the later life services they offer to see if they really deliver on the outcomes that their clients are after in the light of the future issues they may face. If there was ever a reason to adapt to changes in the external environment it would be now, before risking losing touch with those who do.

1NAO, Management of Tax Expenditures, February 2020
2DeVere Group, April 2020
3Kings Court Trust 2018 – assets to pass between generations in the UK

Article by Matt Dickens, Senior Business Development Director