Planning for later life

My name's Fiona Hanrahan and I'm joined by my colleague Gregor Sked. We are both part of the technical marketing team at Royal London and in today's webinar we're going to look at planning for later life as this is an area our technical team and ourselves get asked about regularly and that's not really a surprise as the bulk of people who do seek financial or take financial advice do so as that kind of later life approaches and as later life is a pretty broad term, we're just going to clarify that now. And so, what we're saying is we're focusing on the needs of those people who are 50 and above and the issues that they face when they're trying to compile a financial plan to accommodate their needs as retirement gets closer. One of the great things about our session today is that we're joined by Gregor who works in the protection part of the technical marketing team.

Often sessions like these will only focus on pension and ISA accumulation and retirement and remember that many clients do have protection needs in this phase of their life too. So, we're going to consider issues relating to the wealth clients of already amass and continue to amass, but we're also going to look at protecting that wealth and ways to protect clients from some of those nasty and costly surprises, which can creep up in the absence of thorough planning. The introduction of the consumer duty has significantly increased the importance of these issues being addressed. So just a few housekeeping rules before we move on. If you're watching this as a live webinar, then you'll be able to raise questions using the chat facility down the right-hand side of your screen and we'll get back to you with the answer to those questions as soon as we can after the session.

Alternatively, you can raise your question with your usual Royal London contact if you'd prefer to do that. If you're watching a recording of this, then the chat facility won't be available to you, and you'll just have the option of raising your questions with your usual Royal London contact. With regards to your CPD certificate, at the end of the session, you'll be able to answer some questions and that will automatically generate your certificate. It might take a little time to come through, so don't be alarmed if you don't get it immediately after answering those questions, but it will definitely come to you. That's our housekeeping over. This session should be appropriate for all advisers listening and hopefully it'll help identify instances where referrals need to be made to protection or wealth specialists depending on what your area of specialism is to ensure those client needs are fully met.

So as usual as you would expect, we've got some learning objectives. By the end of this session, you'll be able to outline the strategies to maximize retirement income. You'll be able to explain pension factors impacting clients approaching age 75. You'll be able to describe the features and benefits of different protection products used in later life planning. And lastly, you'll be able to explain how protection advice can support clients in maintaining their later life objectives.

Okay, so the structure of our session today is we're going to look at two different case studies, one for a couple who are just about approaching age 50 and would like to retire at age 55 and the other considers the needs of someone a little later on in that retirement journey - he's approaching age 75. Now as we move through and look at the needs and objectives of these two case studies or groups in the case studies, we'll explore wealth needs and objectives and then pass across to Gregor to identify the protection points.

Please note we've got a broad spectrum of advisers on the call with different areas of expertise, so we might need to explain one or two of the concepts in a bit more detail to cater for those who are less familiar with that particular area. The last thing I want to say before we dive in is that it wouldn't have escaped anyone's attention that this webinar is being delivered just a few days before the budget on the 30th of October. So as at today, this information is correct, but you'll need to be aware that changes in the budget could affect the accuracy of some of the points that we do raise today. So keep your eye on that. Okay, let's have a look at our first case study then. We've got Angus and Freya who aren't married but have been cohabiting for many years and they live in England.

As you can see, they're both 50 and planning to retire at age 55. They've recently finished paying off their mortgage, which is obviously a great position to be in. Freya is earning £180,000 per year and Angus is on £100,000. Both of them have been maximum funding their ISAs for a good number of years and have each around £250,000. While both have been members of their employer’s workplace pension, they've been prioritizing clearing that mortgage more recently, however, now that's paid off, they're looking to put as much money as possible into their pension plans in the run up to retirement. And remember we were expecting them, or they were wanting to retire at age 55. So, what we'll do now is consider some of the planning aspects from a wealth perspective and then we'll pass over to Gregor to do the same from our protection angle.

One of the very first things Freya and Angus need to be aware of, but many in their situation probably aren't, is that the minimum age for most people to be able to take their defined contribution or DCE money purchase pension savings will increase in April, 2028. As you can see here, the current minimum pension age for most people is age 55, and that will increase to age 57. Now, some pensions will have a normal minimum pension age of 55 actually written into their scheme rules. So, for those it will still be possible to take those benefits at age 55 even after April, 2028, but some schemes won't be like that. It turns out Freya and Angus weren't aware that the normal minimum pension age is changing in April 2028 and they won't be able to access their pensions at age 55 as they don't reach age 55 before April, 2028.

The scheme they're in or the schemes they're in has a normal minimum pension age written into their scheme rules, so no option to keep 55, it will default to that age 57. They therefore decide after speaking to their adviser that they're not comfortable stopping work before they can access their pension, so decide to push that retirement out by a couple of years to age 57 plus it gives them a little more time to booster or bolster their pensions. Now, although Freya and Angus have been focused on repaying their mortgage in recent years, they've been members of their workplace pension during that time and they're quite well paid and they've built up a considerable level of pension savings already. However, the current value is unlikely to sustain the lifestyle they're looking to achieve for as long as they're looking to sustain it. So, they're keen to build up their pensions as quickly and as efficiently as they can by as much as they can.

They have a significant amount of disposable income to achieve this, and the extra two years of pension saving that we've just been made aware of is likely to help that too. Now to those of us who work in financial services or deal with pensions day in and day out, these points seem quite rudimentary or obvious, but that won't be the case for those outside the industry. So, the first point to bring to their attention is to make use of employer pension contribution matching. Recent Royal London Workplace Pension research found that 45% of employees in workplace pension schemes say that employers will contribution match up to a specific point. For example, if the member puts in 7%, then the employer will match that 7% contribution. Employer pension contributions are akin to free money, so it makes sense for them to see if this option is available within their schemes.

On a similar note, that employer may facilitate employees making pension contributions via salary exchange or salary sacrifice, you might know as. And that would've a couple of benefits for these higher and additional rate taxpayers trying to boost their pension fund quickly. Firstly, because they benefit from the NI saving, they make and possibly from the NI saving their employer makes too, depending on the structure of the arrangement, but perhaps just as important, they get full higher or additional rate relief immediately and it all goes into their pension rather than having to wait. When higher additional rate taxpayers make that contribution via relief at source, they only get basic rate relief immediately and that remainder is claimed via self-assessment and as a result of that, that additional tax relief may never actually find its way into the pension, which is where they want it to be.

And the final point there is about bonus exchanging that could be quite pertinent for the situation Angus is about to find himself in. Because this year he's found himself in a bit of a pickle, albeit an nice pickle to be in. He's going to get a bonus and he's already been told it's going to be exactly £25,140 and that's going to lift his £100,000 gross salary to £125,140, which is exactly the point at which he loses all of his personal allowances. Honestly, it's as if we made this up. But his employer is prepared to facilitate bonus exchange or sacrifice, so Angus can have all of that bonus paid into his pension rather than receiving it as extra taxable salary or bonus.

Now, I don't really want to bombard you with lots of numbers, so we'll try and keep this as concise as possible. If we start by looking at that before column, so by before we mean before that sacrifice, you can see that taxable income is £125,140, so the £100,000 plus the bonus, and that gives income after tax of £78,110. Remember that last £25,140 is effectively taxed at 60%. We've got that higher rate of tax plus the loss of that personal allowance contributing to that. Then looking at the after column by using bonus exchange or sacrifice, the employer pension contribution is £28,609,32. That's the employer National Insurance Saving of £3,469 plus that salary sacrifice of £25,140 or bonus sacrifice. The income after tax has reduced by £9,553 and the difference is £19,056 and that gives an effective tax relief rate of 67% and that comes from that £19,056 divided by that £28,600. In other words, 66.61% or 67% tax relief. So yes, income after tax has reduced by around about £10,000 as you can see on the bottom row there, but Angus now has £28,609 in his pension as a result with all the benefits that come along with that tax fee growth, favourable inheritance tax treatment, et cetera. Fortunately, as some of you might be thinking, Angus has a little bit of carry forward to use in this case to support that pension contribution along with his regular pension contributions. That wouldn't take him above his available annual allowance, which is exactly what we're going to look at next.

The standard annual allowance is currently £60,000 up until the 6th of April, 2023, the standard annual allowance was £40,000, but this changed to £60,000 on the 6th of April, 2023. So, ignoring any carry forward, taper or money purchase annual allowance issues, this will be the maximum someone can pay into their pension or have paid in on their behalf in a tax year importantly without a tax charge applying. Now that might seem like a very straightforward statement, but from speaking with my colleagues in pensions technical and I used to work there myself and deal with thousands of questions about pensions, it's quite common to get confused between tax relief and the annual allowance. In fact, you often see in pensions literature that the maximum you can pay into your pension is 60,000, but it's not. It's potentially the maximum you can pay into your pension without a tax charge applying. If for instance, someone has earnings of £70,000 and wants to pay in the maximum individual contribution into their pension, the maximum they can pay and receive tax relief importantly is £70,000. In other words, a hundred percent of their earnings.

If that individual had no carry forward available and assuming there are no issues with the taper or money purchase annual allowance, they would therefore have an annual allowance tax charge on £10,000 being the difference between £60,000 and £70,000. So, it's always better thinking about the annual allowance being the amount that you can pay into your pension without a tax charge applying rather than the actual hard maximum that you can pay in.

That bottom point there is just a reminder that used to be the case that you could pay contributions above the annual allowance in your year of retirement, but unfortunately that's no longer the case, but you might come across some people who think it is. That middle point concerning carry forward, that basically means you can use your current year's annual allowance plus what's remaining of your previous three years added together for that current year.

So that's really important too and helps us with any calculations that we have. In theory then someone could have an available annual allowance of £200,000 being two times the old standard annual allowance of £40,000 plus two times the new allowance of £60,000. We'll have a closer look at carry forward now as Freya has just inherited some money and would be interested in putting up to £80,000 into her pension. Remember, as we just mentioned, you can carry forward unused annual allowance from the previous three years and add this to your annual allowance for the current year, giving a total potential or theoretical annual allowance of £200,000. If the tapered annual allowance applied or applied in a previous year, it's still possible to use carry forward. You simply substitute the standard annual allowance for your tapered annual allowance in your calculations.

If you're looking to calculate someone's unused annual allowance it would be wise therefore to get not only a history of contributions but potentially a history of income if the taper is likely to apply too. The taper is not likely to impact Freya while her income is high, it's not high enough to be impacted, but it could be if she were to receive a bonus in a similar way to Angus just did. Now with carry forward, you must have been a member of a pension scheme in the year that you're carrying forward from in order to be eligible to actually use it. So that means basically anyone who's been or is an active member of a pension scheme, a deferred member of a pension scheme, a pension credit member, meaning they've received a pension credit in respect of a divorce and use that to set up a pension plan or a pensioner member, meaning you're in receipt of a pension from a pension plan.

So really then the only people not eligible to use carry forward are those taking out a pension for the very first time as they won't meet any of that or won't meet any of those definitions of member for carry forward purposes.

Now, an important point about how carry forward works is that you maximize your current year's allowance first before going back to the earliest of your three years and then you work forwards. The reason why this is worth remembering is that if you're looking at a client's history of contributions and you can see in an earlier year, they've paid in more than that year's annual allowance, then for that year they've got none left to carry forward as they must have maximized that year first before carrying forward. And that might sound horribly technical, but it really helps when you're looking at historic calculations because it lets you know if there's been a contribution above the standard annual allowance for that year, you can just cross that year out because there will be nothing left because they must have maximized that year first.

And as you may or may not be aware, those with fixed or enhanced protection have been able to contribute to a pension again since the 6th of April, 2023 without losing their protection. So definitely good news for these individuals. As Freya hasn't been prioritizing pension savings whilst they got that mortgage paid off, she's got enough carry forward to make that £80,000 contribution in addition to her usual pension contribution without triggering an annual allowance tax charge. So that's really good news. With a contribution of that size, she's also likely to reduce her adjusted net income below £100,000 for this tax year, meaning as we saw with Angus, she'll regain her personal allowance making even more tax efficient in a similar way as we saw there.

Freya has considerable ISA funds as she's been maxing out her annual ISA allowance for a number of years and she's wondering if there's any benefit in moving some of this to her pension while she's still working and therefore eligible too. She's thinking about moving £40,000 out of her ISA as we can see here, assuming a 5% growth rate net of charges, £40,000 in an ISA would grow to £56,284 in 7 years, by which time she'll be 57 and looking to start to draw retirement benefits.

But what would be the outcome of moving £40,000 from her ISA to her pension? If Freya were to take £40,000 from her ISA and put it into her pension, it would immediately benefit from 20% basic rate income tax relief, meaning £50,000 is invested into the pension and over a seven year period at a 5% growth rate this would grow to £70,355.

But as Freya is an additional rate taxpayer, she will be able to claim back a further 25% tax relief or £12,500. And if this were reinvested in the ISA and again, we assume a 5% growth rate this would grow to £17,589 in 7 years.

But of course, ISAs offer tax fee withdrawal and pensions are subject to tax on the way out. So, let's look at that net tax position on withdrawal. We know the ISA grows to £56,284 in 7 years, and this is the net amount that can be drawn. The pension grows to £70,355 in 7 years, but £17,589 will be tax free, the 25%, and we'll assume that remaining £42,213 can be drawn over time within the basic rate band at 20% tax. So, the net figure here would be £59,802, but remember we also know that the additional rate tax relief, if reinvested into the ISA, will grow to £17,589 in seven years, and this too will be tax-free on withdrawal.

So, to sum all this up then £40,000 left in the ISA, assuming a 5% growth rate will likely provide £56,284 net in 7 years. But following the process we've just outlined, moving the ISA money to a pension, and reinvesting the tax relief in excess of basic rate back into the ISA could result in £77,391 net. It does require the pension withdrawals to be within basic rate tax and Freya probably wouldn't do the carry forward exercise and move the pension money in the same year in order to get that additional rate tax relief for more of the contribution but is certainly something else she could consider. In fact, Angus could do something similar, although given his income level, he's likely only to get higher rate relief and the difference in the two outcomes wouldn't be as pronounced.

There's one last thing I want to touch on before we pass over to Gregor to consider the protection angles. What if one of them died soon or in fact any point before the age 75? Remember they're only 50 right now. What would happen to the money in that pension? So, to consider this, let's recap how death benefits from pensions are taxed from the 6th of April, 2024. And this has got quite confusing because there were a number of changes. We're going to focus on death before age 75. We'll talk about death after age 75 in the next case study, and we're only going to focus on DC or defined contribution money purchase funds because that's where lump sums or tax-free lump sums are most likely. Also, the vast majority of death benefits are established or paid within the 2-year period from when the provider is informed of the death, so we're just going to cover off that scenario.

We'll take uncrystallized benefits first. So, if somebody dies and it's established within two years, what's happening to those benefits? The beneficiary will face a marginal rate of income tax charge on any lump sum they take in excess of the deceased lump sum and death benefit line. So that's a new term from the 6th of April, 2024. So, let's kind of pick that apart a bit. If the beneficiary didn't take a lump sum and went into beneficiary drawdown instead, they would never face that tax charge. And that's a really important point then about the potential benefit of beneficiary drawdown, particularly if we're talking about funds of this level above the lump sum and death benefit lines which for most will be £1,073,000,100. Also, remember once that's in beneficiary drawdown, it can't have that tax charge during the beneficiary's lifetime regardless of how they take it.

A lump sum for the purposes of the lump sum and death benefit loans would only come from the deceased pension plan and be paid out in its entirety. Remember, any death and service lump sum written under the pension rules would be measured against the deceased lump sum and death benefit allowance too. So potentially really important to remember.

It's clearly vital then to make sure beneficiary drawdown is an option for funds above or around about a million pounds because when someone dies, if the beneficiary wants beneficiary drawdown and it's not available, it's unfortunately too late to look for a provider that offers it. And I wouldn't like to have a conversation with a beneficiary facing a tax charge that could have been avoided if beneficiary drawdown were available. And I think it also highlights a really good point about the consumer duty and avoiding foreseeable harm.

I would say making sure beneficiary drawdown is available for those who want it or needs it comes under that duty. So, an absolute must here is that both Angus and Freya complete their expression of wishes form for their pensions. And remember that as they're not married, they need to give the scheme administrators as much help as possible to let them know where those benefits should go if one of them were to die. A change within neuros as well is a treatment of funds and drawdown on death and drawdown. If the beneficiary takes a lump sum, then there's potentially that marginal rate of income tax charge on the amount above the deceased lump sum and death benefit allowance. Remember, death and drawdown when we had the lifetime allowance would never have been a BCE or a benefit crystallization event, a test against the lifetime allowance.

So, there wouldn't historically have been that tax charge. So, I think that might catch people out, but I would say if you're in drawdown, there's obviously a stronger likelihood of beneficiary drawdown being available if you're in drawdown first. So hopefully that tax charge would be avoidable. And this change is important to note for Angus and Freya as they're likely to have pension funds above the lump sum and death benefit allowance around about a £1,000,000 by the time they take benefits. There's a big but here we need to remember funds and drawdown before the 6th of April, 2024 are not measured or tested against the new lump sum and death benefit allowance if death occurs after the 6th of April, 2024. The theory here is that these will have been tested against the lifetime allowance, so it's unfair to test them against the lump sum and death benefit allowance too. So good news potentially, but we still need to remember that difference in tax as neither Freya or Angus have crystallized any benefits prior to the 6th of April, 2024, it won't be an issue or a benefit for them, but I wanted to mention it in case you've got any clients who are in that position.

That's all I was going to say when it comes to pensions for Angus and Freya, I'm going to pass you over to Gregor to consider their protection needs. Thanks Gregor.

Thank you, Fiona, and morning everybody. Hope you're all well. I'm Gregor. I'm one of our protection technical managers and I want to look just now at some of the protection considerations that we might want to address with Angus and Freya. Bear in mind these are just some of the potential considerations, certainly not all of them. Now I'm going to do a little bit more of a deep dive into each of these three circles in a second. But let's firstly just consider what might their current protection arrangements look like? What have they currently got in place at the moment and is it still fit for purpose? We know that their mortgage has recently been paid off, so has any cover taken out to repay that mortgage debt also come to an end? Do they still have liabilities that they maybe want to protect? Are they still as we know and can see that they are of working age?

So, are they still highly reliant on that income if they have an existing income protection policy in place, is it still providing them with the right amounts of cover? And if they had to cover to protect that mortgage liability, what about their health needs? They might now be thinking about the need for healthcare support in the future and actually how could that be funded? But the key thing we want to consider at this point in time is that they are cohabiting. So, what should we be addressing here? And actually, are they aware of the very little protection that cohabiting couples actually face? Now before we look at Angus’ and Freya’s protection needs; I just want to highlight that protection advice should be included as part of all client's financial planning discussions. And actually, there are many misconceptions that surround protection advice such as, I'm wealthy enough, I can get sufficient support from the government.

I already have a little bit of insurance in place and maybe I've got a good employer death and service, or I'm too old to think about it, or I'm too young to think about it. Unfortunately, these misconceptions are a hurdle that the industry does need to overcome to help produce the number of underinsured people across the country. But really, protection advice isn't just something that clients who are taking out a mortgage need to consider, protection advice is for life. Now today, our case studies focus on clients in the to and through retirement and later life boxes on the right hand side, often to stages of life where protection is overlooked. Now, through all of those different life stages, protection needs will look different. There's not one standard approach for all, and actually as clients go through different life stages, much like Angus and Freya, their protection needs are going to change as well.

Their income might rise, that might fall, meaning more or less coverage is needed, families might grow, meaning coverage needs to be widened. We're not assuming it in this scenario, but relationships may break down and actually it may well mean that cover needs to be reviewed, maybe split. Ultimately, liabilities will change, priorities will be reshuffled, but the need to ensure our clients remain financially resilient during different life events doesn't change. And there aren't many different protection solutions to protect client's financial resilience against different life events and also importantly at different life stages as we can see on screen just now.

Now alongside what you might consider as core protection solutions, we should be factoring in trusts, wills, and also long-term care insurance products too. Now, whilst the long-term care insurance market is small, there are still some providers that can offer solutions, whether that's pre-funded products, immediate needs care plans, or even equity release, which is something that we'll look at a little bit later on in the session.

Now, the steady decline in marriages has actually created this world of more blended families with more couples choosing cohabitation. Unfortunately, cohabiting couples often wrongly assume that they form a common law marriage and it's often only on separation or death that they discover that the same legal rights that apply to those that are married or in a civil partnership don't apply to cohabitees. Now, research carried out in 2023 by Opinion on behalf of Royal London found that 64% of adults living as part of a cohabiting couple don't have a valid will. And also 73% didn't fully understand the legal consequences if they or their partner died without a will. So for couples like Angus and Freya who may be part of this changing family unit across the UK, it's really important that they understand their legal position and that they have a valid will in place because if a cohabitee dies without a will, their partner could lose the home that lived in and possibly even paid towards children, parents, siblings, and potentially even a separated spouse are just some of those that could benefit under intestacy ahead of the person that the deceased was living with.

So actually having a will allows individuals to set out exactly what they want to happen when they die and if on their next thing, what you'll see is just a few reasons as to why Angus and Freya might want to consider a will, because actually having a will is one of the first steps that will form an important part of our financial planning conversations with clients. And I'm sure we're all very familiar with the reasons and rationale for writing a will. There are often some less obvious areas where they can add value. They can be a place where you'll typically see guardians named where there's dependent children, maybe digital assets, how will they be dealt with upon death, funeral plans, charitable gifts. And again, from an IHT planner's perspective, they're an incredibly important tool. However, on the next slide, we'll see the absence of a will certainly can create a significant issue because in the absence of a will, the law of intestacy will dictate how and also to whom the property of the deceased is distributed to.

Now, the rules are different in England and Wales, Northern Ireland, and Scotland, but in Angus’ and Freya’s position as cohabitees, the risk of dying intestate is no less serious in any of those regions, meaning that unless assets are owned jointly, the surviving partner isn't entitled to a penny. Now, if they had children together, everything would go to them. If they didn't have children, then parents or siblings would actually stand to inherit their assets over the cohabiting partner. And the final nail in the coffin so to speak, is where there's no surviving blood relatives and the crown, i.e. the government would take the entire estate. So just to summarize here, while we're not looking at a peer protection solution, the intent is about how do we protect the objectives of our clients, particularly those that aren't married or are in a civil partnership. Now on our final side, I just want to take a quick look at an area which we're seeing a growing spotlight put on.

And again, you don't have to look far to see various different headlines discussing the pressure that's been put on the NHS and our recent figures suggested there's currently 7.57 million people on an NHS waiting list in England with more than 300,000 people who have been on the waiting list for longer than 12 months. Now, might Angus and Freya be looking at private medical care? How would they fund the costs of which could be into the thousands of pounds? Are they willing to use their savings, dip into investments and actually how might that impact their retirement plans or actually their desire to leave something behind for loved ones? Now, a recent report by CI Experts, it was in their critical thinking report actually found that 22% of critical illness claims were spent on private medical treatment compared to just 19% that used it to pay off all or part of their mortgage. So perhaps looking at critical illness cover as a means to provide the cost of private medical care rather than repaying a mortgage debt could be worth discussing with clients, particularly those in the position of Angus and Freya. And if the amount of cover is actually less than the mortgage debt, then actually that could help keep premiums down as well. Now Fiona, I'm going to hand back over to you to take a look at introducing our second case study, William.

Thank you so much. Hopefully you found that useful. We're going to move on and consider someone a little bit older. William is age 74. He's widowed and he's in receipt of a defined benefit or DB pension, which has been more than enough to cover his living expenses since it came into payment a number of years ago now. He paid the lifetime allowance tax charge when he took his benefits, but now he also has a fund of £200,000 still uncrystallized. His attitude has been that this fund is for the benefit of his adult children and grandchildren. He's got no need for it and he's under the impression that he has no remaining tax free cash entitlement as he was told, he exceeded the lifetime allowance when he took his benefits from his DB scheme. He hasn't taken any benefits since well before the 6th of April, 2024, and he hasn't had any conversations around how the new rules impact him.

Now it's really important to have a think about clients who are close to age 75 to have a conversation around how the taxation of pension death benefits changes, and we covered off earlier in our case study how death benefits are taxed on death before age 75 and how the removal of the lifetime allowance has affected how they're taxed. Remember, when we had the lifetime allowance, it was kind of done and dusted for most at age 75. Age 75 would have been for most the last opportunity for HMRC to get some lifetime allowance tax charge. If we still right now had the lifetime allowance, William would have faced lifetime allowance tax charge of 25% of his fund at age 75. In other words, a tax charge of £50,000. So, it's excellent news for him that the lifetime allowance has been removed and the benefit crystallization events which used to happen simply due to turning age 75 have gone.

So as there were never any BCEs after age 75, ordinarily the removal of the lifetime allowance hasn't affected how death benefits are taxed on death after age 75. It's more straightforward or simply as you were, whether the benefits are uncrystallized or crystallized. In other words, in drawdown, whether the beneficiary takes them as a lump sum or continues in beneficiary drawdown, the entire benefit is subject to the marginal rate of income tax for the beneficiary. So, for William or anyone who's older than age 75 with a tax-free cash entitlement, there's an important conversation to have around that tax-free cash. Remember, we said William paid the lifetime allowance tax charge when he took his benefits from his DB or defined benefit scheme at the time he got PCLS or tax free cash of £200,000 and he had no lifetime allowance protection from the 6th of April, 2024 as he took benefits in excess of the lifetime allowance before the 6th of April, 2024.

If he does nothing, he's got no lump sum allowance or no lump sum and death benefit allowance. That's simply the rules. This assumes he got 25% of his lifetime allowance tax-free or in other words, £260,275 but he only, in inverted commas got £200,000. So, can anything be done here? As the new rules are a cap only on tax free lump sums it's kind of unfair then that William isn't allowed to have any more tax-free cash. He only got £200,000, but the rules let you have up to £268,275. So due to this sort of problem or issue, there is a process, or something called a transitional tax-free amount certificate, which can be applied for. Which would allow William to have some lump sum allowance of £68,275. Basically, what you're doing here is substituting the assumed £268,275 that he was assumed to get but didn't actually get with what you actually got, which in Williams' case is £200,000 meaning there's some lump sum allowance or some tax free cash entitlement left of £68,275.

Now that's more than enough to cover 25% of the £200,000 that he has still got uncrystallized. So that's really good news for William because this change in the rules has meant that William no longer has the lifetime allowance tax charge at age 75 of £50,000 and he's got some tax-free cash left of £50,000. In theory, that could rise to £68,275. So that's two excellent aspects that William wouldn't have had before those rules changes and applying for the transitional tax-free match certificate, he will also have some lump sum and death benefit allowance of £873,100. So, from nothing to £873,100 obviously a huge difference. Remember though that the lump sum and death benefit allowance won't apply after age 75 as death benefits are all taxable. So, this lump sum and death benefit allowance maybe really isn't relevant for him, as he’s so close to age 75, but it could obviously be relevant, very relevant for anyone younger than this.

So just as a summary then for William, before reaching age 75, he will have tax free cash available of £50,000 based on a fund value of £200,000 and any lump sum death benefits will be tax free for his beneficiaries as they will likely be within that available lump sum and death benefit allowance with the additional option of beneficiary drawdown if they want. Remember, there's a big if here because this is only if he applies for the transitional tax free amount certificate as that will allow both that lump sum allowance and lump sum and death benefit allowance to be available. It simply won't be if he doesn't apply for that certificate, that will all change on turning age 75 as the right to any tax free cash will die with him and all the benefits will be taxable for the beneficiary.

So, this is a really important conversation to have. Are we simply saying that anyone over age 75 should just take any remaining tax-free cash? Here's what I would base any discussion around for anyone in this situation. Do they actually need the tax free cash? For example, if someone is going to take it and spend it because they think they should, then that's great. If they're going to take it and gift it to some beneficiaries and live for 7 years or if it's within their exemptions, then that's probably fine too. If they take the tax free cash because they think they should and that sits in their bank account and ends up subject to inheritance tax, then it might have been better off staying where it was in the pension. This is because 40% inheritance tax could be worse than any marginal rate of income tax the beneficiary pays on any withdrawals.

So, the tax rate of the beneficiaries is importantly potential knowledge you want to know too. So, the point I want to make here is that there's no right or wrong answer, which would apply in every case as often with pensions the answer is it depends on the circumstances. I think it's also worth saying that clients could miss tax rate cash entitlements after age 75 as you've no longer got that age 75 benefit crystallization event. For example, a provider in the past would've pointed out any uncrystallized benefits to them at age 75 because there would've been that BCE or lifetime allowance check. As this is no longer the case, clients with tax-free cash entitlements after age 75 could get forgotten about or clients not receiving advice might not realize that this tax-free cash entitlement will die with them. In summary then, when it comes to pensions, what's important in the run up to age 75?

It's definitely good news that the BCEs five A or five B are gone. Those ones that happened simply by virtue of turning age 75. Remember for William, this meant that he didn't have a tax charge of 25%, which for him would've been £50,000 that would've been deducted from his fund. So excellent news that that's no longer the case. You might come across clients who were deliberately taking more withdrawals than they needed from their pension funds to cap that tax charge on the growth and drawdown. Obviously, you don't need to do this anymore as that tax charge has gone. If a client is above age 75, there's potentially an issue as there is an error in the legislation. This is because historically, any tax free cash or PCLS taken after age 75 wouldn't have been a BCE. Remember therefore any lump sum allowance calculations will be incorrect.

This is scheduled to be corrected though, so just bear that in mind if you're looking at any lump sum allowance calculations for anyone over age 75 just now. As we did with William, have a think about any tax free cash entitlements after age 75 and if it's better to take them or leave them, bearing in mind the beneficiaries will face tax on that full amount. Beneficiary drawdown is potentially even more important on death after age 75 because that full fund is taxed, it could be better for the beneficiary to control when they take their withdrawals as that could be far more tax efficient than taking a lump sum. Remember, beneficiary drawdown needs to be available from the deceased plan. It's too late after death to transfer to a provider for beneficiary drawdown if it's not in drawdown first. So, following on from this point, it's vital to make sure expression of wish forms are kept up to date and consideration given to those who want drawdown. This wasn't an issue for William, but if there is going to be a surviving dependent, anyone else not dependent who wants the option of beneficiary drawdown will need to be included on that expression of wish form. Now, as I hope you're expecting, I'm going to hand back to Gregor to cover off the protection options for William and anyone else in a similar age band.

Thanks. So, William's protection planning points, what might they consist of? Well, I think the fundamentals of estate planning for someone in this stage of life are likely going to be consistent of minimizing the inheritance tax payable on the estate, minimizing the impact that ongoing care costs might have on the value of the estate and also as we've looked at in our previous case study, ensuring that there's a will and or trusts in place. Now, if we head onto the next slide. Of those three planning points have just mentioned there, I'd say the latter two are likely going to be of greater concern for clients with a more modest estates, while your more affluent clients will be wanting to consider all three. Now in fact, if we just look at the number of estates which actually trigger an IHT liability, fewer than 5% of estates fell into that category in the government's most recent figures.

Still, this equates to a very nice sum for HMRC of upwards of £7,1 billion in the 2022 to 2023 tax year. Now, we also know that William will have his full Nil Rate Band and in this case study he has a Nil Rate Band available to him, but he does also have his late wife's unused transferable no weight band too. So, one area that we often see there being a barrier to protection advice is with regards to understanding how IHT works. If we head onto the next slide, please. For William, we need to ensure that he understands how it works and what it means for him. He may know that there's a tax on death in some situations, but he may not know the finer details or actually exactly how it could impact him. So is William aware of his own Nil Rate Band and how it works?

Is he aware that he can actually pass on assets up to the value of his Nil Rate Band without it creating an inheritance tax bill? Is he aware of the transferable Nil Rate Band that is possible for him to be able to transfer any of his unused percentage of his Nil Rate Band or his late wife's no rate band to add onto his own? Is he aware of the residency Nil Rate Band? So does he understand that it will taper away on estates more than £2,000,000 and actually property needs to be left to lineal descendants? Or does he know that leaving 10% or more of his estate to charity would reduce the IHT payable from 40% down to 36%? And if we know he's a passionate supporter of a particular charity or cause that could be useful knowledge for him. Just one of the things that we see is just helping customers understand some of the basic terminology with regards to inheritance tax planning.

On the next slide, we'll see some of the common forms of lifetime gifts and some of the exemptions available. Lifetime gifts could provide volume with a tax efficient way to give some of his wealth away while he's still alive without it being included within his estate. And there are of course, certain exemptions that reduce the amount of lifetime gifts that need to be added to the estates after death. Now they include the annual exemption currently worth £3000, and that's the value of gifts which William could give away each tax year without them being included within the value of his estate. He could also make small gifts, so he could make gifts of up to £250 each year to anyone with no limits on the number of £250 gifts that can be given. However, they must have already received gifts from William in the same year.

So, if he'd already gifted somebody his full £3000 annual exemption, then they couldn't be gifted a further £250 and qualify for this exemption. Also, as I said, does William have any affiliation to a charity or political party? If he does, then actually during his lifetime to death, he could make gifts to registered charities or political parties. And remember, if he did leave at least 10% of his estate to a registered charity on death, then the IHT liability would be reduced to 36%. One of the lesser known ways of reducing the value of one's estate, but it can be a very effective one, is if William had surplus income, then he could make gifts which are technically unlimited in value, but to qualify as unlimited, they would need to meet three tests. So, they need to be from income, not capital. They've got to be regular, and it can't reduce his standard of living.

Now that gift could be used to pay for school fees, pension contributions, funding of an ISA for children or grandchildren and so on. And one of the ways this type of gift could actually provide additional values to use that surplus income to set up a Whole of Life policy again that signed into trust. Lastly, William could make gifts of up to a £1,000 per person or £2,500 to grandchildren or great-grandchildren or even £5,000 to a child in respect of a wedding. So where does protection come into all of this? Well, gifts made from William's estate during his lifetime are exempt from IHT, provided that he survives for a period of seven years after the date that the gift is made. Now these lifetime gifts are typically known as potentially exempt transfers or PETs, and they're not restricted in value. So should William die within seven years or within that seven year period, there is a potential liability to inheritance tax, which in certain circumstances may reduce over a period of time. That reduction in liability is often what we know in the industry as taper relief.

So, in essence, William could have a full 40% liability if he died shortly after he made the gift. But gifts made three to seven years before his death are taxed on a slight and scale. Now, the most common way of protecting the beneficiaries of these gifts from the potential tax liability is to set up life policies to cover the reducing liability. These are known as gift vivo policies. They have a fixed 7 year term with cover reducing in steps to match the reduced liability as taper relief takes effect. Now, although the cover is reduced, the premiums will typically stay fixed for the seven years. Now instead of a gift inter vivos policy, somebody could consider using a multi-benefit protection policy or a multi-cover plan made up of effectively a group of five level term assurance covers. Now, these five covers would run alongside each other with terms of three, four, five, six, and seven years respectively.

Again, each cover should ideally be set up at one fifth of the liability. Now this reducing cover will match the reducing inheritance tax liability in the same way that a gift inter vivos policy does. But there is an added benefit in that the premiums that the individual pays will also reduce each year, after year three, as each of the individuals’ cover ceases. Now this can be useful because it can significantly reduce the overall cost and also if they need to cover the liability on the residual estate and they can actually add in another level of cover for that amount or combine it with the seven year term cover, or if circumstances are even more complicated and gifts have been made in different years, then the cover can actually be tailored to meet the liability as older gifts drop out of the calculation. Really, the possibilities are almost endless, meaning that it's much more flexible and cost effective than some of the more traditional gift inter vivos policies.

Now we head on to our next slide. I want to just quickly look at trusts. Now in a financial planning context, trusts are one of the most important tools at your disposal. But in a protection advice context, very few life policies are actually assigned to trust. Now the more obvious benefits of William assigning any existing or future life policy to trust are to have greater control over who receives the money from the policy upon a claim and under what circumstances. Where a life policy's been assigned to trust, insurers won't need to see a grant of probate or certificate of confirmation before the payout proceeds and also the policy won't be included within any IHT calculation on William's estates. But it can also be very useful if William had young or vulnerable beneficiaries as the trustees could provide an extra level of comfort known the benefits are being looked after on their behalf.

Many trusts also give trustees the power to make interest free loans to beneficiaries. Now, these loans need to be repaid back to the trust on death, but if they're repaid from the deceased beneficiaries’ estate, then it could be deductible from their estate, thereby reducing the value for IHT purposes. And this can be particularly useful where an estate includes a debt such as a mortgage deemed to be repaid. Unless that debt is actually repaid or paid from the estate, it's not deductible for IHT purposes. Now the lending of the money also allows the original debt to be repaid from the estate and is therefore deductible in the IHT calculation. And when the estate is settled, the loan is repaid to the trust. At that point, it doesn't form part of any of the discretionary beneficiary's estate, so it allows time to consider any other planning that may be appropriate.

For example, a beneficiary may have significant wealth and an IHT liability themselves, so don't want to receive the money and would rather it was passed onto the next generation. So, you can see there why trusts are fantastic financial planning tool. Now, if we go on to our next slide. When it comes to Whole of Life policies, Whole of Life policies are a fantastic way to provide protection where there is an IHT liability that's expected to remain indefinitely. So, a way to provide the beneficiaries with the funds to meet an IHT liability. Now the two most common types of whole life policies that you've got at your fingertips are Guaranteed Whole of Life policies. So, these provide sum assured equal to the expected IHT liability at a guaranteed premium for the whole of your life. Reviewable Rate Whole of Life policies also provide cover for the whole of your life, i.e. in this scenario provide cover for the whole of William's life. But premium rates are reviewed at various intervals in the future. Now at Royal London, the reviews take place at 10 years and then 5 years thereafter. Premium rates will increase as a result of the client getting older. However, the advantage that Reviewable Rate policies have over Guaranteed Rate policies that they are significantly cheaper in the first 10 years. Reviewable Rate Whole of Life policies can also be used quite effectively in conjunction with other strategies of actively reducing the value of an estate. So, the policy covers IHT liability at a relatively modest cost while work's going on in the background on reducing the value of the estate. And if some cover is still required in 10 years time, then the policy can be continued. By that point, the IHT liability may have reduced, and again, during that 10 year period, some of the strategies that have taken place hopefully have helped reduce it.

So, the sum assured could be lowered accordingly and that will have the effect of partially of testing the increase in premium as a result of those rate reviews. Some providers also offer joint life second death. Some advisers I speak to quite regularly write life policies to age 90, and some providers also offer life cover with a convertible term option. Again, they're all effective ways of using protection policies to mitigate an IHT liability. It might very well be an important consideration for William to consider equity release as well as a form of covering the cost of future care. Now for William equity release could allow them to generate a lump sum of money, maybe an additional income or even a mixture of both whilst remaining in the property. Now the two main equity release options available to William are home reversion plans or lifetime mortgages.

Now, from a home reversion plans perspective, it would involve either a full or partial sale of William's property, but then he would retain the right to continue living there through a lifetime tenancy. And in return, William would get either a lump sum or an annuity paid with a lifetime mortgage typically available to those over age 55. So, in this scenario, William would typically be eligible, they'd provide a loan secured against the property value. So, if William were to consider this option, he would still own a hundred percent the property and these loans tend to be open-ended, so they would be there for the remainder of William's life. The mortgage would then typically be repaid from the sale proceeds of the property on his death. And in terms of the form of William receiving some form of capital, they would provide William with either a lump sum of money or actually even a drawdown facility.

Just in terms of some final thoughts. So, a few final thoughts over what we've looked at from both case studies today. So, before we look at the list here, one of the things that I wanted to pull out and a really important one actually, is with regards to powers of attorney. So, for clients at all stages of life, and particularly those at the case studies that we're looking at today, is there a power of attorney in place? So actually, why might there be a good conversation to have here if there isn't one in place? Well, reminding clients that they're ready for practical reasons to cover maybe a period of time if the individual is abroad or if they're in hospital, maybe they suffer, were to suffer from physical constraints that they couldn't actually sign legal documents, or if the donor's financial affairs become quite complex and they want someone to act on their behalf and in a way of provision for future loss of capacity.

Now, lasting powers of attorney typically take one of two forms, either a health and care decisions, lasting power of attorney, which would include the power to make decisions about the donor's healthcare and personal welfare or financial decisions, lasting powers of attorney. And they're about providing access to making decisions about the donor's property and financial affairs.

Now, LPAs lasting powers of attorney, they actually replaced enduring powers of attorney in England and Wales back in 2007. If you are based in Northern Ireland, then you can still arrange enduring powers of attorney. Alternatively, if you're up in Scotland and the equivalent to an LPA is your continuing power of attorney. But again, going back to this little list here in terms of dealing with a family home it’s worth bearing in mind how any property is owned. Is it owned as tenants in common or whereby on death the value of the individual share would pass to their estate?

Or is it held in joint tenancy? So, on the death of one of the people, their share would automatically pass to the survivor. And it was really important to be aware of this, particularly when it comes to married or those that are in civil partnerships where maybe one's needing state funded care while the other's living in the family home and subsequently dies. Because if the family home is owned as joint tenancy, then the property or proceeds from that sale of the property could potentially be assessed by the local authority within their financial assessment. It's also really important to remember that when looking at the family home that some strategies could be challenged by the local authority if there's a belief that there's a significant motive to deprive the individual of assets. From a state benefits perspective, again, really important to consider what state benefits are available because the potential impact that your advice might have on local authority funding and state benefits needs to be considered under the FCA's Business Principle nine.

From a vulnerable customer perspective, again, we cannot overlook the fact that in many of these scenarios we could be dealing with customers in very vulnerable positions. Now, the FCA actually outline a vulnerable customer. Someone who due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care. And if anybody's had a look through the FCA’s Financial Life's 2022 survey, they've got some really powerful stats that suggest 47% of UK adults show one or more characteristics of vulnerability. 24% of UK adults have low financial resilience and 60% of UK adults find keeping up with things like domestic bills and credit commitments a heavy burden or somewhat of a burden. So, in terms of supporting vulnerable clients, again looking at having flexible processes, whether that's verbal, written communication, offer for flexible meetings, so in the home, again, timing frequency to suit the individual, recognizing various different trigger points.

We've got some fantastic resources on our adviser websites to help you identify these different trigger points, potentially even looking to the appoint vulnerable champions within your firm and offering right information at the right time, reducing jargon in technical terms, instructing a letter of authority. And as we've just discussed, a minute ago, consider appointing a power of attorney as well. Looking at some of the final thoughts with regards to Fiona's pension planning points, again, we've looked at some of the age 75 planning points. Be aware of the new pension death benefits, consider the use of salary or bonus exchange and keep expression of wishes forms up to date as well. So back up on screen should be our learning outcomes. We should hopefully have managed to achieve all of those learning objectives over the last hour. I'm just going to pop up our last slide, which is our adviser website adviser.royallondon.com. And just wanted to say on behalf of Fiona and myself, thank you so much for your time today. We will do our best to follow up with all the questions asked within the next few days. And do remember that your CPD certificate will follow on from our webinar today. But just once again, thank you so much for your time. Hopefully you found it useful and enjoy the rest of your day.