Later life planning has been of growing significance and importance to financial planners over the past decade. However, events over the past year have created particular pressures to add to the existing reasons why financial planners should give attention to the area. This article explores three of the most pressing issues later life planners should consider and prepare for, and how a comprehensive later life plan, delivering more than just estate planning for inheritance, is increasingly important.
1. Tax: a window of stability in uncertain times?
As the Spring Budget on 3 March drew closer, speculation about the potential for tax increases to help pay for the booming deficit brought about by Covid-19 grew, and advisers and investors alike were clearly mindful of this threat.
So, it was a relief to many when, instead of announcing sweeping hikes in taxation, the Chancellor proved mindful of the fragility of the economic recovery and focused on retaining and creating jobs and supporting businesses. For personal tax affairs, the headline was a long list of rates and reliefs being frozen until 2026.
However, uncertainty about the future is a constant, especially in a period of profound economic adjustment. So, how should advisers help to steer their clients through any further speculation and undoubted change?
For more than a year now, many have held off on making vital long-term decisions due to the fear of the unknown, yet they need to accept that another year or more of inaction due to the potential for further uncertainty comes with its own real risk. And the longer it goes on, the more risk they are taking.
Taking this backdrop into account, a strategy that remains inherently flexible to any possible future changes, but in the meantime delivers on the key outcomes the client requires is going to be the most appealing. Any financial plan needs to stack up in line with the wider objectives of the investor, such as achieving investment growth, rather than focusing purely on the associated tax advantages, as these advantages could change or even disappear. This is why I believe advisers should be developing a wider later life planning proposition, and not just be narrowly focussing on estate planning.
Here is an example of a desired outcome of someone planning for later life:
“To manage my financial affairs in a way that means I can meet whatever opportunities or challenges may arise in the future. This includes growing my wealth throughout my life, dealing with long-term care and, lastly, being able to pass any remaining funds on to my loved ones.”
Breaking this statement down into individual objectives, the adviser will be looking to:
- Maintain flexibility and access to the investment, so they can make regular or lump sum withdrawals as required.
- Maximise income and wealth through continued investment growth.
- Provide both financial and practical support to the delivery of care needs, if ever required
- Reduce the potential for inheritance tax (IHT)
Note the wish to reduce any IHT payable is deliberately last on the list of desired outcomes. The danger of focusing on the estate planning part of these objectives is twofold. First, the threat of future legislative changes, or tax relief changes, causes uncertainty as to the efficacy of any purely tax-focused strategy. And this remains the case whether one feels they can predict the future or not!
Second, the danger of ignoring the other higher priority objectives. Many tax-focused strategies are a one-trick pony and restrict the potential for wider benefits. In this case, with a tax-focused strategy, 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 investment rationale and wider utility of the service you recommend should lead the planning decisions, rather than just narrowly focusing on the tax benefits.
2. Ongoing volatility
Another challenge that is unwelcome in retirement and 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 live off, helping family members in need, paying for sudden care requirements or ultimately passing the investment on to beneficiaries upon death are not easily predictable events. Reflecting upon the volatility of markets in 2020 and the uncertainty of 2021 and beyond, investors in later life 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 past decade, is to look to private investments that are not exposed to market sentiment in the same way as listed investments, so can suffer less volatility. 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 as much in value. 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 lingering Brexit effects, these loans can provide an attractive return with low volatility. Such companies are common investments for Business Relief qualifying services.
3. The ever-increasing demand for care advisory services
In the same way that the increasingly maturing cohort called the baby boomers have recently come under discussion by advisers with respect to their intergenerational wealth 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 most family members who have experience of a loved one being in care are not satisfied with their experience.
Planning for care is therefore a key consideration in later life planning. It is important to have both flexible access to your wealth and a specialist care advice service.
An opportunity for later life planning
If there was ever a reason to adapt to changes in the external environment it would be now. While challenges exist, as we begin a new tax year, there is an opportunity for wealth managers to scrutinise the later life services they offer to see if they really deliver on the outcomes and needs of their clients. Only by factoring in potential changes to the financial 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 all investors.
The original version of this article was published in FT Adviser on 24 February. It has been updated and republished, with permission, here.