This article is for professional investors only, and not intended for retail investors.
Published in Professional Adviser and Financial Investor 24
As the shoots of Spring arrive, the general rhetoric is that the worst of the cost of living crisis could be behind us, or it is at least losing some of its recent bite. However, recession or no recession, it seems likely that we will feel the pinch for quite some time.
Many in this cohort are retired and don’t need to worry about the potential of job market instability or lack of wage growth. They may also be mortgage-free, so rising interest rates are not of great concern. While volatility might see their savings dip, they can often weather turbulence, not being required to call on lump sums for house purchases, school fees, and the like. Spending is often discretionary.
While this all paints a rather rosy picture, the real sting for retirees comes from inflation, especially in the context of relatively low interest rates, something that hasn’t been an issue throughout the economic downturns of recent memory. High inflation impacts all demographics, and fuel and general living costs have a painful impact on people operating a tightly controlled (even if very comfortable) budget. At the same time, interest rates remain low, and there is little opportunity to offset the increased outgoings with higher income.
This environment can create short-term pessimism that results in long-term financial planning inertia – compounded by a generation that has not experienced this set of economic circumstances for a long time. For clients whom advisers believe should be considering estate planning, putting off decisions can severely impact a positive outcome for them and their families. Between April 2022 and January 2023, Inheritance Tax receipts grew by almost 10%1. House prices have increased since the pandemic2, even if they have fallen marginally of late, and so more estates will creep above the Government’s nil rate band of £325,000. What’s more, the nil rate band is frozen until 2026 and so won’t take into account any asset price inflation. At the same time, people are very conscious of the high cost of care and don’t want to lose control of their savings. The average cost of a care home is £600 per week, which rises to over £800 in a nursing home3.
Still, considering the threat posed by inertia alongside a few more positive pieces of news and data, perhaps now isn’t such a bad time to re-visit those seemingly intimidating financial plans. Household energy bills will offer some respite from the cost of living during the warmer months and inflation is widely reported to have reached a peak, falling for the third month in a row to 10.1%4 in the year to January, with more declines forecast to the end of the year. Your estate planning clients might remain cautious, but at the same time, begin to consider that not acting upon an estate plan holds the most significant risk of not achieving the most desirable outcome.
We have discussed this issue with financial advisers; they have shared a few tips to help overcome inertia with later-life clients.
1 HM Revenue & Customs, 21 February 2023
2 Propertydata.co.uk, 18 January 2023
3 Age UK, February 2023
4 ONS, 15 February 2023
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