One of the least considered impacts of lockdown has been the loss of contact between grandparents and grandchildren.
This has been heartbreaking for all concerned, as grandparents provide vital support to their children and grandchildren. But can grandparents help their children or grandchildren in a different way?
The over 70s now are not like the over 70s of previous generations. They're often healthy and busy, sharing their time between family, holidays and volunteering. Many of your clients are able to go on several holidays a year.
However, this year is different – the next time they might be able to go on holiday is when there's a vaccine.
While this is inconvenient, it may also carry a tax implication. Let’s take a cruise holiday for example. The typical cost for two weeks in the Caribbean with a deluxe balcony cabin and premium economy flights is around £6,500 – £7,000 per couple.
Many people go on three cruises a year, so are potentially spending around £20,000 a year. For clients who might have to decrease their drawdown income, this could be a welcome saving.
But what about clients who have an inheritance tax (IHT) problem?
Perhaps they're in final salary schemes and some of that income's now piling up in the bank account. They could have children or grandchildren who have been financially affected by coronavirus due to being made redundant or furloughed. Helping them out with cash at this time might be important, but longer-term planning should also be considered.
Pension contributions for others are a great way of saving IHT, especially when the normal expenditure from income exemption is used. This exemption is technically unlimited subject to the payment being regular, from income and not reducing the standard of living of the donor.
It gives the recipient a pension for the future, saves them income tax (as it's treated as if the recipient made the contribution and it's the recipient’s relevant earnings which are important) and potentially gets them out of a tax trap. So how does it work?
- Martha, age 72, is a retired doctor with a scheme pension of
£55,000 per year.
- She's married to her husband, Marco and they have a son, David,
- She was going on two holidays a year with Marco.
- She wants to set up regular contributions from her pension income.
Even if Martha did intend to go back to two holidays a year at some point, she has plenty of income, so it wouldn’t impact her standard of living. She can also stop contributions at any point.
Martha's son, David (42) has three children under 12 and a yearly salary of £60,000. This means he's hit by the High Income Child Benefit tax charge, which effectively means he's hit with a tax charge that cancels out the amount of child benefit received.
To escape the trap, he paid more in pension contributions. This reduced his adjusted net income to £50,000, so he escapes the tax charge.
David's wife has been made redundant during the crisis, so he's stopped his £8,000 pension contribution, meaning he's once again affected by the child benefit tax charge.
For the £10,000, he earns over £50,000, he only sees £3,455 after income tax and the child benefit tax charge is deducted (£10,000 – £4,000 income tax – child benefit charge of £2,545 = £3,455).
However, if Martha sets up a regular pension contribution for David of £8,000, this will reduce his adjusted net income again (total income – gross pension contribution in this case) to £50,000.
David will now have £8,000 in his bank account (£3,455 + £2,000 higher rate tax relief + £2,545 from no child benefit tax charge), plus a pension contribution of £10,000. On a family basis, that's 121.8% tax relief (£3,200 IHT, £4,000 income tax, £2,545 child benefit tax back).
Building relationships with family members
Recent research by Quilter shows that demand for financial advice has increased among many age groups amid the pandemic, but 18-30s have shown the greatest increase, followed by 30 to 45 year olds - you can be that point of contact.1
Also, research from Octopus states that two thirds of beneficiaries don't have a financial adviser and only 46% of advisers don't have any relationship with their clients' children.2
It's perhaps easier to pick up the phone to clients right now and ask the questions that you haven’t asked before, including about their families.
Helping them to help their family also means that you develop relationships with the wider family and you can act as a point of contact for them for their own financial needs.
1 Research conducted for Quilter by Toluna of 1,000 UK adults in April 2020.
2 The Great Wealth Transfer, Octopus Investments, January 2019.