Changing UK government policies have hit many ‘easy targets’, with some clients feeling let down by the Government, according to Richard Watkins, Chartered Financial Planner at Continuum.
Financial prudence is not being respected by the state and when combined with geo-political tensions, cost of living challenges, wider economic challenges, lack of education in financial matters has created a critical period in history for personal financial planning.
Many clients are facing new financial challenges, particularly around recent and upcoming changes to inheritance tax rules.
Richard Watkins shared one example of a client facing new issues due to changes to government policy.
He said: “Here was a diligent 67-year-old single woman who has worked and paid tax all her life. As well as a final salary pension entitlement from a previous employment she has invested for over 21 years. Her value of home, chattels, and ISA pre budget would only have incurred a potential small liability to inheritance tax.
She has significant care costs for her elderly mother and, despite being careful with her spending and extremely prudent with her savings including carefully accumulating a pension fund to mitigate IHT, now faces the prospect of having her entire estate wiped out by tax and care costs.
Like many she does not consider herself to be rich, or even wealthy and, despite voting for the present Government at the last election, now feels unfairly targeted.
Moreso, she asks the question, not unreasonably, of why she should not just have a good time with her savings now and let the State pick up her future old age costs.”
Potential solutions that Watkins has been considering with clients include:
Cash flow planning
Prepare a detailed income and expenditure profile, projected forward to say age 95, using reasonable assumptions about inflation and investment returns for both capital and income.
Add in anticipated costs, such as care costs in old age, to detail expenditure profile projected to age 95 and examine the most tax efficient way of meeting expenditure.
This will also determine your net income requirement.
If the cash flow shows a surplus, consideration could be given to spending it.
Care costs could be met by cashing in investments every 6 or 12 months to meet anticipated costs, depending on circumstances. Circumstances will always determine strategy.
Life cover
Whole of Life cover for anticipated inheritance tax liability, written in trust. On the death of the policyholder, the trustees pay HMRC. The sum assured (the IHT liability) does not form part of your estate and is usually good value for money.
You will not see the benefit, but you are paying the premiums, so you need to factor these costs into cash flow.
Invest in IHT mitigating investments
These usually fall outside of your estate after two years if held to death. Therefore, assuming you live longer than two years, these investments do not form part of your estate when calculating IHT.
These are business relief friendly investments and are generally seen as higher-risk.
Give it away
Clients can consider using the normal expenditure out of income exemption. You can give away more than the £3,000 annual gift allowance if the gifts are out of income and do not compromise your standard of living. However, this has a limited effect in reducing IHT liabilities as you need to be able to prove the gifts are out of income.
If you expect to live for seven years or longer you can give much larger sums of money and property away as your heirs will not need to pay inheritance tax on anything gifted seven years or more before your death.
Watkins adds: “ A well-prepared cash flow forecast can help you account for potential liabilities, anticipate income and surplus, identify opportunities, and provide a useful indication of whether you’re at risk of running out of money. A good cashflow forecast can significantly improve your ability to manage cash effectively.
Of course, bigger issues here are that many people will be unaware of the significant impact that changes to tax legislation can have on them and question why they should be prudent with their money and save for their old age. The benefits of good financial planning should be clearly communicated, incentivised, and embraced by the state. The consequences of not doing so are causing great anxiety for some clients – these are critical times.”
Richard Watkins is a Chartered Financial Planner at national financial advice firm Continuum, with over 30 years of experience in financial services. He is a Certified Financial Planner and Chartered Wealth Manager.
