Matt Dickens, Senior Business Development Director at Ingenious, reflects on why 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.
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 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 dealing with long-term care, whilst growing my wealth throughout my life 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 focussing on the estate planning part of these objectives is twofold. Firstly, the threat of future legislative 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. 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.