At Ingenious, we consider estate planning to be just one part of a comprehensive later life plan. Business Relief (BR) solutions should be approached as an investment service in their own right and not solely considered as a tax solution. Advisers should remember not to let the, “tax tail wag the investment dog.”
When it comes to undertaking BR due diligence, we have six golden rules advisers can use to position their clients for the best possible outcomes for both estate planning and later life.
Estate planning is about leaving the most to our chosen loved ones as a legacy. Individuals should therefore plan to maximise the wealth they will have to ultimately pass on to their beneficiaries, whilst considering any potential needs, such as home improvements or travel, as well as the possibility of needing to pay for care one day. As well as helping to meet any needs, strong growth is also a key weapon to counter the negative forces of inflation, so seeking a steady, long term, meaningful return is always crucial.
Costs are another guaranteed negative force on investment returns and so should be minimised. Lower costs can also reduce risk. A manager with lower fees doesn’t need to chase extra risk to cover these costs before delivering on their specified or target return, which is calculated once fees have been deducted. In addition, high costs can indicate the investment is not delivering best value to the investor, but that instead the manager is taking the significant benefit.
BR investments are investments into underlying portfolio companies, which can carry out a wide variety of BR trading activities. These companies and the markets in which they operate should be clearly understood by the adviser. BR companies tend to either own and operate assets or carry out a lending trade. Some do both. Broadly speaking, those with a higher proportion of their portfolio in physical assets will see their fortunes depend on the performance of those assets and will fluctuate on the fundamentals of the sector. Those more focused on lending should see more steady returns as they will have lent money at normally fixed rates and any market fluctuations should have less impact. The associated risks of both routes, including their sector, liquidity and valuation risks, vary widely between strategies. This should all be considered in the context of the investor. Is the trading strategy and associated risk appropriate for their profile?
When making any investment, it is crucial to purchase the asset at the correct price, taking into consideration the potential future sale value. For BR, there are two main considerations.
The first is being aware of the methodology undertaken by the manager when calculating the Net Asset Value (NAV) of the service. Owned assets tend to be more complex to value, are reliant or many variable assumptions and have more potential for subjectivity. Valuations that appear not in line with current market fundamentals or with similar services, should be assessed carefully. Lending services tend to be more transparent and less subjective to value.
The second consideration is whether the share price for incoming investors is trading at a premium to the audited NAV. If so, this should be reviewed, as it means the investor is taking on extra ‘valuation risk.’
Investors in later life do not normally wish to give up control and flexibility of their wealth to achieve estate planning or investment objectives. It can be an uncertain time and being able to adapt is key. But any access to this capital should be managed in a tax-efficient way, considering Capital Gains Tax (CGT). One way to do this is through investing with a Manager that only offers newly issued shares, rather than using matched bargains. Such shares, after a three-year holding period, should qualify for Investors’ Relief, capping CGT on any disposal at 10%, rather than the potentially higher 20%.
One in three people aged 85+ require some form of care1. As well as making the most of any investment, later life planning should seek to provide further utility, for instance, in the preparation for potential care needs. By considering the potential cost of care and practically pre-planning to meet any care needs, the investor will be equipped to make the right choices should this issue arise.
If advisers want their clients to get the most from any BR service they recommend, the use of these rules should help ensure the optimal outcomes.
1AgeUK Briefing: Health and Care of Older People in England, 2019
First published on Professional Adviser
First published: FT Adviser
Article by Matt Dickens, Senior Business Development Director
Later life planning has become more topical than ever over the past year as our whole industry has worked hard to absorb the changes brought about by the pandemic, progressing financial planning to meet the “new normal”. This article explores three of the greatest challenges later life planners currently have to consider and prepare for, tax changes, market volatility and the cost of care, and shows how a comprehensive later life plan, delivering more than just estate planning for inheritance, is increasingly important.
In 2019, the new Conservative Government, facing the challenge of delivering an orderly Brexit, but not yet dealing with the impact of a global pandemic, promised there would be no changes to Income Tax, National Insurance or VAT. Eighteen months on, they find themselves in an unprecedented economic scenario, with a deficit of £394 billion1 (19% of GDP), its highest level since 1945. While commentators remain focused on the ongoing pandemic and its impact on both lives and livelihoods and when it might come to an end, they also have one eye on the issue of paying for the extreme lengths the Treasury has gone to, to keep the country financially afloat. Likewise, investors are equally mindful of this issue – if the Government needs to balance the books through fiscal policy, how will any decision made now fare in a post-pandemic financial future?
For advisers, there are two clear ways to approach this planning dilemma.
Firstly, one could attempt to foresee the future and plan for the measures that might be implemented in the coming months and years. The problem with this approach is that one would need a crystal ball.
Secondly, one could accept that there is no way to predict the measures that will come into effect and wait until there is some form of clarity. But herein lies the problem of delay in the face of continued uncertainty. For almost a year now, many have held off on vital long-term plans due to the fear of the unknown, yet they need to accept that another year or more of inaction due to the potential of further uncertainty comes with its own real risk. And the longer it goes on, the more risk they are taking.
The simple answer to this conundrum is to embrace a strategy which remains flexible to any possible changes, but in the meantime delivers on the key outcomes the client requires. Any financial planning strategy needs to stack up in line with the wider objectives of the investor, such as achieving investment growth, rather than focusing purely on the tax advantages of a particular strategy, as these could change or even disappear. This is why I believe advisers should be developing a wider later life planning proposition, and not just narrowly focussing on estate planning.
Here is an example of a desired outcome of someone planning for later life;
To invest capital in a way that maintains flexibility throughout later life to pay for any unplanned needs, but also consider any potential care needs that might be needed, knowing that their wealth has been successfully grown up to the point of death, so maximising the legacy that will be passed onto the chosen beneficiaries.
Breaking it down into individual objectives:
Note the desire to reduce any IHT payable is deliberately last on the list of desired outcomes. The danger of focussing on the estate planning part of these objectives is twofold. Firstly, the threat of impending tax changes, or tax relief changes, causes uncertainty as to the efficacy of any purely tax-focussed strategy. And this remains the case whether one feels they can predict the future or not!
Secondly, the danger of ignoring the other higher priority objectives, as many tax-focused strategies are a one trick pony and restrict the potential for wider benefits. In this case, the investor may have to forgo any long-term investment growth, or the flexibility to easily and predictably access the investment to pay for care, for instance.
So, when considering the threat of tax changes to later life planning, the approach should always be to allow the investment rationale and wider utility of the service you recommend to lead the planning decisions, rather than just narrowly focusing on the tax benefits.
Another challenge that is particularly unwelcome in later life and particularly visible in the current environment is the potential for continuing investment volatility. In this phase of their lives, investors are unlikely to have the flexibility to “time the market” when they want access to their wealth. For instance, making a withdrawal to help family members in need, pay for care requirements or ultimately passing the investment onto beneficiaries upon death. These are not predictable events. Reflecting upon the volatility of markets in 2020 and the uncertainty of 2021 and beyond, investors may well be minded to forgo any potential upside of an investment, perceiving them as too risky.
However, an alternative, as many asset managers have been doing over the last decade, is to look to private investments that are not exposed to market sentiment in the same way as listed investments are. While on the face of it this sounds riskier, certain investment strategies can provide investors with an appealing level of security and predictable returns. One way to do this is via private companies that engage in secured lending. By their nature, loans carry lower risk than equity investments as they do not fluctuate in value over time. Senior, asset-backed loans provide the investor with additional protection against any loss in value. Executed within sectors that are demonstrating strong resilience to the pandemic and any ongoing Brexit effects, these loans can provide an attractive return with low volatility. Such companies are common investments for Business Relief qualifying services where services should be valued on their “fundamentals” not reliant on positive investor sentiment.
In the same way that the increasingly maturing cohort called the baby-boomers have recently come under detailed discussion by advisers with respect to their intergenerational planning needs, the same level of consideration should also be given to their increasing need for long-term care. During the pandemic, the importance of and reliance upon the UK’s care system has become very clear, yet there is an insufficient level of planning taking place to ensure that people are prepared. Research shows that the majority of family members who have experience of a loved one being in care were not satisfied with their experience. One of the factors that can surely make this unfortunate outcome more comfortable is being prepared, both financially and through being armed with knowledge or advice on this complex sector.
This is why it is more important than ever to flexibly have access to one’s wealth in later life. It is impossible to predict what any one person’s needs are going to be in the future and so separating money to prepare for care and to prepare for estate planning is futile. At the same time, perhaps the need will not arise and so the money could be contributing to the investor’s other objectives rather than being held back from an investment. So, undoubtedly a flexible posture to later life planning is key and if the investment can gain value over time to contribute to paying for life’s needs then all the better. The final benefit that could assist with this challenge is a specialist care advice service, which is included for all Ingenious Estate Planning (IEP) investors. As well as advising clients and their families on the vagaries of the UK’s complex care system, the IEP Care Service helps investors to make decisions in a time of need and stress. Specialist, independent advisers give individuals and their families invaluable support, liaising between the NHS and care providers to achieve the best possible care outcomes.
2020 brought several challenges faced by later life planners into sharp focus. The pandemic made us far more aware of our mortality and the importance of planning ahead. The next 12 months should herald an opportunity for wealth managers to scrutinise the later life services they offer to see if they really deliver on the outcomes and needs 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. 2021 should be seen as a great opportunity. Only by considering any changes to the legislative landscape, delivering consistent and attractive risk-adjusted returns and considering any future needs and costs of our clients, can we deliver a truly robust and value-adding financial later life plan for investors who need it.
1Office for Budget Responsibility, Economic & Fiscal Outlook, November 2020
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.
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.
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.
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.
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.
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.
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
Financial planners and wealth managers strive to deliver on the needs of their clients by always providing the most suitable and effective advice. But as with any service, this advice should also be delivered at the best possible value for the investor. Value can be simplistically defined as the service that delivers the most benefit, balanced against the financial cost, but in the estate planning space, how do you assess what good value is?
Product fees are guaranteed to negatively impact returns, so it is important to minimise their impact when looking to gain the best value from the investment. Some managers report little or no fees paid by the investor to the manager, but instead charge the company or investment service itself. While this might initially be seen as better value for the investor, it is not as simple as that. Investors in unlisted BR services become a shareholder of the portfolio companies, so the reality is that any fees paid by the companies are effectively being paid by the shareholder (or investor). Therefore, both investor fees and company fees will both negatively impact the final return and must be considered together.
Analysis of what a manager is paid by the investor and by the company over a significant period will enable an adviser to conclude if the manager is offering good value, or if a disproportionate amount of fees is going to the manager at the expense of their investors.
Another key component of assessing value is what the investment actually delivers. For BR solutions, investors’ main objective is commonly to pass on the maximum sum possible to their beneficiaries upon death. This may lead to a conclusion that delivering Inheritance Tax relief at the lowest possible cost is the primary driver of value. However, especially for clients with longer time horizons, the one-dimensional goal of avoiding a potential 40% Inheritance Tax bill can easily over-shadow the equally important goal of aiming to steadily grow the investment, preventing erosion by inflation, drawdowns and investment fees. Unlike some IHT-focused solutions, such as trusts or gifting, investors in BR services do not have to accept zero growth of their wealth from the point of investment. Instead, investors can continue to earn returns, either taking an income stream or increasing the final sum to be passed onto their beneficiaries, precisely in line with their original objective.
While most BR managers predict their ongoing returns at a certain level, those targets are not guaranteed and historic performance varies widely.
Given that the majority of managers in the BR space state their performance targets net of fees, to produce positive growth and achieve their target return, those managers must first earn back any fees they are taking. Let’s take the below scenario to illustrate this point.
 | MANAGER 1 | | MANAGER 2 |
| Annual performance target, net of fees: 3% | Annual performance target, net of fees: 4% | ||
| Annual fees: 3% | Annual fees: 1% | ||
| Gross performance target: 6% | Gross performance target: 5% |
Initially, it might appear that Manager 2 must be taking more risk to target a higher net return of 4% than Manager 1, who is targeting 3%. However, Manager 1 has to deliver an additional 2% of gross return than Manager 2, to make up for charging higher fees. Higher fees not only impact returns and value, but they can also mean greater risk.
In the Tax Efficient Review’s most recent analysis of Unlisted BR Services1, they released data that ranks services in the market in terms of both investor returns and total fees. IEP Private Real Estate achieved the top rank for returns delivered, with the second lowest total fees in the market, demonstrating that it represents attractive value for investors in comparison to other services.
If you would like further information on the analysis and the competitive set, please email us with your name and organisation and a member of our Business Development team will get in touch.
Past performance is not a reliable indicator of future performance. The value of an investment may go down as well as up.
1Tax Efficient Review, March 2020
Article by Matt Dickens, Senior Business Development Director
First published on Wealth Adviser
The macro-economic conditions of the last five years have presented a relentless challenge for money managers seeking to produce consistent returns. It seems an all too distant memory that UK markets were caught in a period of low volatility since the recovery from the financial crisis started in 2009. Enter 2016 and we have since found ourselves in an era of exceptional uncertainty. An acrimonious Brexit referendum and the following ambiguity, pressure on sterling, repeated challenges to the UK Government, a trade war between two of the world’s super-powers and now a global pandemic.
Under these exceptional conditions, many investment strategies have understandably struggled to sustain the growth that investors had previously enjoyed without taking on elevated levels of risk and experiencing greater volatility and its associated negative impact. While Coronavirus has not been a threat isolated to the UK, the global impact on stock markets is making it harder than ever for UK investors to find an investment with low volatility and the prospect of growth. Across world markets, both developed and emerging, we are seeing drops in company valuations, recessions, poor jobs data and rock bottom consumer confidence.
However, Ingenious Estate Planning has been operating an alternative investment strategy in real estate lending for several years and over this turbulent time, it has continued to produce a steady return, with low volatility1. The strategy invests in experienced, unlisted property developers that possess little correlation to the main listed markets2 and there are promising signs that certain areas of the UK property market are showing sustained resilience to the global pandemic, as I discuss further here.
The affordable end of the UK’s residential real estate market has proven to be extremely robust during the recent uncertainty. The market benefits from some core fundamentals that have assisted it withstanding a lot of the pressures experienced by other sectors. Firstly, a large and sustained supply deficit. In 2018 the UK built 80,000 fewer houses than the actual requirement of 300,0001. This strong, inherent demand poses a clear investment opportunity to investors who can fund construction projects in the safe knowledge that there is an established demand on completion.
Secondly, this supply deficit has been recognised by Governments for several years and there has been a raft of policies enacted, all supportive of building more houses. For instance, the Help to Buy scheme has enabled many, often first-time buyers onto the property ladder. This scheme means there is a well-established and subsidised group of buyers ready to buy whenever developers complete construction.
Thirdly, and more recently, the Government has acted quickly to identify the property sector as one that is key to the UK’s recovery from Covid-19. Proposed relaxation of planning laws, a stamp duty holiday and extension of the Help to Buy scheme, coupled with changing consumer demands for more outdoor space has left the confidence in the housing market at a four-year high3. Both the construction and sales market are being given valuable incentives that support an ongoing return for real estate investors. While it may be questioned whether this is a short-term reaction, Savills recently revisited their 5-year house price forecast in the wake of the pandemic, but made no change to their predictions of a 15% rise across the UK as a whole by 20244, as fundamentals remain.
Despite these positive forces however, there remain some risks with investing in the property market, so a conservative investment strategy is key to protecting investors. Rather than take a 100% equity, or ownership, position in a housebuilder, developer or single property, a portfolio-based, secured lending model has a number of clear risk-mitigating benefits. For instance, by lending to a portfolio of developers, carefully selected on a project-by-project basis, and by earning a fixed rate of interest, rather than taking equity risk, there is inherently lower volatility in returns, given the protection of a senior debt position on each development. Contracts set out clear loan terms meaning that regular interest is paid and repayments of the loan begin as soon as discrete units of a development are sold, creating liquidity for the fund and diversification benefits for investors. Upon final sale the repayment is made in full, all with the benefit of banking-style security protections. By contrast, equity investments and associated valuations can fluctuate over time as the asset price changes and so it is far more vulnerable to market conditions and sentiment, and ultimately any drop in value is suffered by the investor. In the lending model, any loss is initially felt by the borrower.
IEP Private Real Estate utilises this secured lending investment strategy, which has continued to deliver a consistent level of activity during the Covid 19 pandemic. Residential asset values and transaction volumes have held up well throughout the portfolio, across varying locations and price points, as evidenced through recent successful exits of projects in Southend-on-Sea, Bristol, Slough, Southall and Motspur Park through a combination of sales and refinancing. We have also seen partial repayments from completed projects in Rugby, St Ives, Bushey & Kingston at values that underline the performance of our portfolio of investments.
The Business Relief- qualifying service is commonly used by clients planning for later life, because after 2-years the Shares should be exempt from paying Inheritance Tax. As savers and investors reach retirement and decumulation, they present wealth managers with a unique set of investment problems. Without careful planning, the start of this phase for many could signal the end of any capital growth and herald their savings being eroded to pay for life’s needs. Any investment offering both high volatility and potential drawdowns may therefore become unpalatable. And while many would wish to gift savings to their children to mitigate the risks to their beneficiaries of paying a hefty inheritance tax bill upon their death, the thought of losing both control and access to these savings when they may still need them, means many feel uncomfortable in taking that step.
However, this does not need to be a fate accepted by savvy investors and planners who can utilise a proven trading strategy that continues to both carefully and predictably grow their investment while also providing potentially full relief from Inheritance Tax.
For more information on Ingenious Estate Planning Services, contact our business development team at investments@theingeniousgroup.com
1Ingenious, June 2020
2Ingenious, June 2020
3Royal Institute of Chartered Surveyors, August 2020
4Savills, 2018
As the Government begins to ease the Covid-19 lockdown, a small level of normality is being resumed for some. But with mistrust in the stock market and financial anxiety high, what have we learned about planning for later life and how can investors be guided through this stage of financial planning in a time of such uncertainty?
For most, 2020 will be a financial year we will rather forget. The FTSE 100 Index experienced its second largest one day fall in history, 59% have reported a loss of income1 and there is discussion that the recession could turn into an entrenched depression. Those planning for a long retirement with heavy reliance on their hard-earned capital could be forgiven for shying away from any financial plan with the word investment attached. But this anxiety can lead people to retreat to perceived safe-haven assets like cash and forgo potential investment benefits. Stockpiling (cash not pasta) to provide for basic financial needs can result in capital erosion and leave other areas of later life planning, such as inheritance tax efficiency or flexible access, neglected.
For many, the pandemic has brought about a focus on mortality. As a result, we have seen an increase in enquiries about passing wealth to loved ones efficiently, which is of course a crucial part of later life planning.
But I have written before about the importance of looking beyond legacy planning in achieving a holistic approach to later life planning. There are numerous objectives to meet simultaneously, including preserving assets, seeking a return to pay for retirement, avoiding volatility, optimising tax-efficiency, and planning for unpredictable costs such as care.
When planning in later life, most services neglect the majority of these outcomes, often focussing only on one aspect, such as income or tax efficiency rather than taking a holistic approach. In the current environment, which has created a lot of uncertainty and anxiety, re-visiting investors’ full range of objectives and focussing on the outcomes they require is key to not making uninformed, irreversible decisions.
Most investors planning for later life are in the decumulation phase, with little or no new income and a focus on paying for retirement. To limit capital erosion, especially for those in the earlier stages of later life planning, a return on capital is therefore desirable and certainly should not be considered unattainable. However, when investments are relied upon for ongoing specific needs, volatility is the ever-present enemy. The recent volatility, though extreme, has heightened awareness of how investments can be impacted by market sentiment, so investors should be made aware of how to access the return required without the need for exposure to volatile markets.
Volatility risk can be mitigated by the use of unlisted investments that are not subject to the same systemic risk as all listed investments. For instance, private trading companies carry the benefits of being valued solely on their fundamentals, rather than short-term sentiment. To deliberately target predictable returns, they can engage in secured lending, meaning investors are not exposed to equity or operational risk. Lenders who select quality counterparties and operate under robust lending criteria, can achieve targeted, stable long-term returns.
Life is unpredictable and no matter what stage of life you are at, unexpected costs continue to present themselves. Be it a family wedding, home improvements or the cost of care for example, it pays to be able to access savings. Therefore, flexibility is key to later life planning and investors should be deterred from making irreversible decisions that may only meet their tax efficiency or income objectives but neglect the potential need to access their assets.
For example, there has been an increase in demand for fixed-term annuities since the Covid-19 pandemic2, and although this solves the problem of a reliable income, with no volatility, it removes the flexibility people in later life might need if their circumstances change.
Financial planning for inter-generational wealth transfer in the UK is needed as the country is set to hand over £55tn2 between generations over the next 40 years. But as we all live longer, investment objectives are becoming more complex and varied, putting great onus on the financial adviser to deliver a flexible solution to best ensure an optimal client outcome. Ingenious Estate Planning is a family of flexible services that focus on outcomes in later life, targeting low volatility and steady return, investing in companies that should qualify the investment for inheritance tax relief after two years.
For more information on Ingenious Estate Planning Services, contact our client relationship team at investments@theingeniousgroup.com
– 1Source: ONS: Personal and economic well-being in Great Britain, May 2020
– 2 Source: The Great Wealth Transfer is Coming, Putting Advisers at Risk, July 2015
It is widely known that the UK’s population is ageing. In fact, by 2060, people will spend a third of their lives in retirement, according to AgeUK1. While the prospect of a long and healthy retirement is of course appealing, unfortunately living longer brings its own challenges and a need to plan accordingly to optimise well-being.
Ageing increases the likelihood of requiring professional care due to the increased propensity of disability or chronic and complex health conditions. One in three women and one in five men are likely to require residential care in later life2 and many more will require professional or informal care at home.
While this paints a somewhat gloomy picture, forward planning can alleviate stress and hardship at what is undeniably a difficult time for families. While some seek professional advice through care consultancies directly, financial advisers can also be a valuable resource. By considering your clients’ later life planning in a holistic way, you can advise on financial preparation as well as providing valuable planning resources. This can include involvement of your clients’ families, making the role of the financial adviser indispensable in times of need.
Through sharing some of Ingenious Care service’s insights into the complexities of the UK care system, we hope to help you build on your knowledge and emphasise the importance of planning ahead.
The UK’s care system is fragmented and relies on communication between the NHS, Social Services, families and care providers. Each has responsibility for different parts of an individual’s care across an infinite number of possible scenarios. Without experience, it can be problematic to navigate towards the best outcome.
From the individual and their family’s point of view, this is made harder as they are asked to be experts in something they have most likely never experienced before. Getting the care of a loved one right first time is crucial to their well-being and the experience of the whole family.
‘The challenges faced by those entering and receiving care should not be underestimated; there are many inherent barriers to people making well-informed choices in this sector.’ The Competitions and Markets Authority.
The UK offers many different types of care and care settings. These range extensively from day centres, visiting care and live-in care, to care homes providing residential and nursing care, with many variations and specialisms in between. Many people assume they would choose a care home based on their judgment of a noteworthy feature, a beautiful garden or period building perhaps. But when care is needed, everyone’s situation is unique. Choice is determined by a variety of factors, including the type of care required, location, affordability, quality, and other personal choices.
In 2016/17 there were 8,500 domiciliary care providers in England, with high numbers of suppliers leaving and joining the market, employing around 680,000 people. The quality of this care varied with 81% being rated ‘good’ by the Government Inspectorate CQC and 16% rated ‘requiring improvement’.
In addition, there were approximately 11,300 care homes in the UK, managed by around 5,500 providers. Again, the variation in quality is enormous. In England, 58% were rated ‘good’ by CQC, while 27% ‘required improvement’ 3.
There is also an increasing use of assistive technology for people wanting to protect their health and wellbeing and live independently. There are three types to consider.
Assistive devices include a whole range of products such as walking sticks, grab rails, stair lifts and electronic pill dispensers, all designed to help people remain safe at home.
Telecare devices range from items such as personal alarms, fall detectors and intruder alarms to in-home monitoring. For example, motion sensors and pressure mats can monitor normal behaviour patterns and send alerts to a chosen emergency contact or call centre if they detect that something may be wrong, such as a prolonged lack of movement or a fall.
Telehealth devices are used to enable health professionals to remotely monitor long-term health conditions, such as diabetes or high blood pressure.
Different approaches suit different needs and individuals. One certainty is that there are a vast range of care options available and selecting the right one can hugely enhance well-being. But the system is complicated and when people are not equipped to ask the right questions or speak to all the possible agencies, they can suffer and pay more than is required. Prices can differ greatly, but importantly, highest cost does not necessarily determine the best quality or most appropriate care.
Through forward planning and considering local care options prior to any care need, financial advisers can help clients invest towards the cost of care and ensure that funds are accessible if care should be required.
The cost of care often comes as a shock to families. In the South East of England, the cost of privately funded domiciliary care currently varies from around £17-£26 per hour on weekdays, while care home rates (covering all types of care) range from around £800-£2,000 per week. That’s £41,600-£104,000 per annum4.
There are sources of state funding, some of which are means-tested. For example, those in England with assets of over £23,250, who do not qualify on health grounds, will be required to pay for most of their own care. For residential care, the £23,250 includes the value of their house (unless the individual concerned has a partner or other dependent who will continue to live in the house). However, the rules are quite detailed, and vary across England, Scotland, Wales and Northern Ireland.
There are other types of funding available, for instance attendance allowance, and financial advisers or other independent specialists can be an invaluable resource to families making plans for care to ensure all applicable funding is received. Because ‘expensive’ does not necessarily mean ‘best’, professional advice helps ensure that clients avoid any inappropriate costs and benefit from all available allowances.
Through being aware of the vast array of services available in the UK care system and the costs involved, financial advisers can initiate conversations with clients to encourage forward planning for this complicated topic. Planning gives families time and distance to prepare, away from an emergency and leads to better outcomes.
A simple way of providing this advice is through Ingenious Care services. This is a complimentary advice service available to investors in Ingenious Estate Planning (IEP), offering bespoke advice to individuals and their families to help navigate the complexities discussed within this article. Our nationwide team of dedicated care advisers provides help and support on all aspects of care, whether planning ahead or facing an emergency. They help people make the best possible decisions and avoid costly mistakes.
Sources
1AgeUK , 2019, 2LaingBuisson, 2014, 3Kings Fund, December 2018, 4Grace Consulting market research, Q1 2020.
First published on Wealth Adviser.
The Covid-19 pandemic has shone a spotlight on the UK’s later life care system. Like many essential services, it has come under extreme pressure and is rising to this enormous challenge, but it is a worrying time for those who are in care or need to consider care services for themselves or their family. Financial advisers should be involved in every aspect of later life planning for their clients, including preparedness for professional care, so we spoke to one of the country’s leading care advisers to find out more about the pressures and complexities of the care system during this crisis.
Grace Consulting provide families with bespoke, independent advice on how to find the best possible care solutions for their needs and wishes.
As with all key services, the care system is learning as-we-go with this new virus. Care homes have had to close their doors to visitors, which can be distressing for residents and their families and shielding at home can lead to social isolation. Patients are being discharged from hospital more rapidly than usual and there are staff shortages, due to self-isolation and the stress and emotional strain being put on carers. According to LaingBuisson, as of 15 April 2020, an estimated 12% of care home front line staff were unavailable for work. Care facilities are having to rapidly adapt existing practices, causing disruption within homes and agencies. It is a very complex combination of conditions to navigate while prioritising the best interests of the individual.
At Grace Consulting, we are reassured that in most cases our clients with care in place are managing well. When Grace Care Advisers call to check how they are managing, they rarely express concern about the current situation, just gratitude to the dedication of their carers. For example, carers in care homes are making great efforts to take phones to people and to help with tablet video calls (not always with total success!). Some are sending regular photographs to families. Each kind intervention helps to keep families in contact and reduce anxiety.
These unprecedented times have brought to the fore the benefits of planning for later life. There has inevitably been an increase in the need for rapid decision making where people have been taken urgently to hospital due to sudden illness and where families have been unable to visit due to social distancing and restrictions on movement of people.
Additionally, we have witnessed a more acute focus on mortality across the population. This has brought about an openness to discuss, plan, and increase propensity to engage in conversations about later life care between family and loved ones. We hope that once the pandemic is over, and we can meet up again with our family and loved ones, we will continue to see the benefits of this. Financial advisers and independent care advisers can help facilitate these conversations and make sure that funds are in place to help realise these plans if the time comes.
Yes. This pandemic has shone a light on the importance of the care sector and its incredible work. An increased awareness of the hugely valuable and onerous role carers play has garnered new respect for the sector. Services have ramped up in an extraordinarily short time period as the Government has been forced to fast track initiatives that have been on the agenda for some time. This has provided us with the tools we require to continue to meet our client’s needs. We have been able to offer advice based on new and fast-changing guidelines and maintain open lines of communications with care facilities so families can continue to monitor the care provision of loved ones. We have worked with various agencies and government bodies to accommodate demand for temporary care after hospital discharge as well as working with individuals to plan for longer-term solutions. All this has been enabled by a streamlined communication between health and social care bodies.
This experience should encourage people to start planning for care earlier than before, to put contingency plans in place and where necessary consider setting up powers of attorney, not just for finance, but also for health and welfare. This gives individuals the control over decisions that may be made for them in an emergency and loved ones the confidence that they are doing the right thing by the individual.
We have also seen the incredible support technology can give in times of emergency or isolation. We encourage every family to set up smart phones and tablets that can enable them to continue communicating with loved ones. Something we are no doubt all benefiting from at the moment.
The bespoke and independent guidance services of Grace Consulting are available as a complimentary facility to all investors in the Ingenious Estate Planning range of services. Speak to your local professional Ingenious contact or get in touch for more information.
The Covid-19 pandemic has created a huge need for specialist care for vulnerable people in the UK. Be it an emergency care requirement, assistance with avoiding social isolation, or support for a family unable to visit a loved one in a care facility, the Ingenious Care Service provides bespoke support for our investors and their families.
The Ingenious Care Service is available at no cost to Ingenious Estate Planning investors, and their families, who select the additional Care service when they invest. The specialist support is provided by market leader Grace Consulting, to help investors plan for later life care needs, whenever they need it the most.
There is currently a raft of information from the Government and care facilities, making an already complex system very hard to navigate. Here are some of the issues we are helping to support, but our advisers are on hand to help with your personal circumstances.
Existing Investors, or their family members, requiring support should contact Grace Consulting directly on 01483 203066 and ask to speak to your personal Care Adviser who will provide guidance tailored to your own personal situation.
Ingenious Care Services are available as a no-cost option to Investors in Ingenious Estate Planning, our market leading suite of later life solutions. For more information please contact;
Simon Harryman, Senior Business Development Director
07949 747828
