Estate Planning Guide

THINK ABOUT RETIREMENT, NOT JUST ESTATE PLANNING Thought Leadership DIRECTOR OF EXTERNAL AFFAIRS AND POLICY, INSTITUTE FOR FAMILY BUSINESS (IFB) If you advise business owners about their Wills and assets, it’s very likely that BR is on the list of things you will talk to them about. BR is an important relief that allows successful family businesses to pass from one generation to the next, without needing to break it up and sell parts off. But not all business owners will want to keep hold of their shares until death. Some may decide to release some of the shares to the next generation when they pass over management responsibilities. To understand what is best for your client, you really need to understand what the family’s succession plans are, and what the current owner’s retirement plans are. If an owner wants to phase the transfer of their shares to the next generation it’s important for them to understand the qualification criteria around Gift Hold-Over Relief from Capital Gains Tax as the rules are different to those for BR – particularly around the ‘trading test’. But it’s also important to think about how the business owner will fund their own retirement. If they don’t have a pension or other savings they may need to rely on dividends from the business for their income. If that’s the case then passing the shares on before death might not be suitable, and they will then need to understand whether their business assets will qualify for BR when the time comes. The IFB is the UK’s family business organisation – supporting and championing family owned businesses at every stage of their journey www.ifb.org.uk We are all living longer and with this comes additional financial risks. Unexpected demands are made on retirement savings, many older people enter retirement with debts, interest only mortgages as well as the need often to support their children and grandchildren. Funding care isn’t top of most people’s planning priorities but increasingly needs to be a key consideration. Statistics show typically people now have around 20 plus years in retirement (from the age of 65). But the research suggests that on average, men underestimate their life expectancy by almost four years, and women by two years (Aviva). Those who fall into the one in three individuals born today who will live to 100, underestimate their longevity by an even greater margin. Decision-making ability tends to decline as cognitive ability reduces. The conversations with clients about the risks of living too long for their retirement and the need for careful planning, need to start relatively early. Adequate contingency measures such as having both Financial and Health and Welfare LPAs in place as well as an up to date Will are fundamental. A well-advised investment strategy that aims to achieve good income and capital growth to help fund care in later life is important, as is the understanding of the impact of inflation. The pension reforms of 2015 mean that there is now flexibility and choice when accessing pension savings. These offer planning opportunities if properly advised. However, drawdown investors don’t have pooled risk* in place, which can create mortality drag*. Drawdown investments need to work harder as investor’s age to provide the same income as an annuity. And if the individual loses cognitive ability they need to ensure that their affairs can be dealt with properly. Annuities still have a role in the at-retirement planning space and impaired life annuity options, available to those with a reduced life expectancy, at a later stage may become attractive if maintaining a sustainable income from drawdown becomes challenging. An experienced accredited later life adviser will understand how all the options for funding care work including accessing non-means tested benefits and when insuring against longevity risk with specialist products such as immediate care needs annuities is an appropriate consideration. CARE PLANNING VEHICLES LONGER RETIREMENT MEANS GREATER RISKS Thought Leadership JOINT CHAIR OF THE SOCIETY OF LATER LIFE ADVISERS (SOLLA) JANE FINNERTY *Annuity providers use a ‘pooled risk’ approach. They assume that some people who buy this product will die sooner than expected. This means they will ‘subsidise’ the people who buy the same product but live longer than expected. The benefit of this ‘mortality cross-subsidy’, for the people who live longer, is that they will continue to receive income for the rest of their life. It is this cross-subsidy – or pooled risk – that allows the provider to offer this income guarantee. With drawdown, there’s no cross-subsidy/pooled risk as the individual is going it alone, so, there is no one supporting their income if they live longer than expected. This is mortality drag. 108 PRACTICALITIES AND TIPS FIONA GRAHAM 109 PRACTICALITIES AND TIPS