The inclusion of unused defined contribution (DC) pension funds in estates is shaking up advice and boosting the use of onshore investment bonds as a solution, new research from Chesnara Life (UK) Ltd shows.
On average, advisers say more than a quarter (26%) of clients are already overhauling estate planning advice ahead of the measure which comes into effect in April next year, the study found.
Around one in eight (13%) questioned for Chesnara Life’s Onshore Bond Adviser Sentiment Survey said 40% or more of their clients are changing their estate planning strategy now.
That process will continue throughout the year – by the time unused DC pension funds are included in estates, advisers estimate on average that 30% of clients will have amended their estate planning. More than one in five (22%) estimate 40% or more of their clients will have changed their estate planning.
The research, which investigates advisers’ use of onshore investment bonds as well as their views on key market issues, found that they expect to make greater use of onshore investment bonds, and onshore investment bonds combined with trusts as key solutions.
Around 71% of advisers said they expect to increase their use of onshore investment bonds with estate planning clients following the inclusion of unused DC pension funds within estates. A similar proportion, 68% anticipate making greater use of onshore investment bonds with trusts. This compares with just 27% who expect to increase their use of funds more broadly and 22% who plan to rely more on cash and equity ISAs. Meanwhile, one in five (20%) advisers said they would make greater use of property wealth, while 10% expect to increase gifting through lump sums.
The research found advisers believe estate planning has already become tougher ahead of the unused DC pension funds change – 81% questioned said IHT and estate planning had become more challenging and complex in the past two years.
Mark Lambert, Head of onshore bond distribution, Chesnara Life (UK) Ltd, said:
“The inclusion of unused DC pension funds in estates from April next year is already having a significant impact on clients and advisers with many having to completely overhaul their estate planning.
“Previously for many clients, estate planning had a core focus on maximising pension investment but with that avenue being effectively blocked from April 2027, onshore investment bonds and trusts are emerging as a major alternative solution.
“That reflects what we’re hearing from advisers: as estate planning becomes more complex, trust-based planning, often alongside onshore investment bonds – is moving higher up the agenda, underlining the need for more support from providers.”
“In the survey, 68% of advisers said they anticipate making greater use of onshore investment bonds in conjunction with trusts for estate planning clients.”
Onshore bonds offer zero tax on cash dividends at a policyholder level while non-dividend income is taxed at 20%. Capital gains realised within the Bond are subject to UK life fund taxation.
This “fund level” taxation treatment of income and capital gains results in a full basic rate income tax credit being available to the investor when a chargeable event arises. This, in effect, means that the policyholder is treated as having already paid basic rate income tax on these gains. Top slicing relief and 5% p.a. tax deferred rules on withdrawals remain. Lifetime transfers by way of assignment without consideration are generally not treated as taxable events.
