Inheritance Tax Nil Rate Band to stay at £325,000 after all

After the last budget we had been expecting the inheritance tax nil rate band to increase from £325,000 to £329,000 in 2015. This has now been set back to 2018, by which time it will have been frozen for 10 years. This means the potential saving of £1,600 per estate (40% of £4,000) in each of those years is lost.

The extra tax revenue for the Government will go towards paying for the imminent capping of long term care costs at £75,000.

These two decisions together form an interesting blend from an advice point of view.

The introduction of the cap is designed to encourage individuals to begin saving towards the possibility of needing care in later life. Long term care costs are currently both unpredictable and uncapped, and as a result there’s been little focus on saving for it. When a target is both unknown and unlimited it is hard to turn it into a realistic goal.

The cap will allow planning with greater certainty and with a known funding target. In addition, if care isn’t needed, individuals would still have access to their savings or they could be passed on through their estate.

So, from a holistic advice point of view, it makes sense to mark this down as something to work towards.

In terms of the change in the planned IHT band, careful planning can more than offset the £1,600. The use of allowances and exemptions over time, for example regular income gifts or one off larger gifts can help wealthier clients stay on track to minimise or remove inheritance tax as a problem. Of course this is better started sooner rather than later, as these allowances do not accrue year by year.

If you have any questions about planning for later life, be it covering the costs of long term care or passing your estate on to the next generation, please get in touch and we will be happy to advise.

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The Lost Generation

There have been two recent conversations of late that serve to illustrate the worrying lack of understanding of how much retirement might cost.

The first was from someone wondering how we might get more income from his retirement pot.  Put more money in I said, not entirely tongue-in-cheek.

Secondly, a young woman said she would save what was left of her income once her bills were paid and her “fun” money was set aside.

I’m not sure you can owe your pension plan the contributions, but you get the picture.

This from the MetLife 2011 Retirement IQ:

“2011 shows a significant increase of respondents who say that the greatest financial risk facing retirees is longevity. Sixty-two percent of respondents answered correctly in 2011, compared to 56% in 2008, and 23% in 2003.”

I’m genuinely concerned that our mighty Financial Services industry has not managed to get the message to the public that you need to plan to stop work and that you’ll need money to do it.

It’s a pretty simple concept and to take more from the MetLife’s Mature Market Institute research, even if people are prudent, sensible and save for retirement, longevity and market risk are leading to generations that will run out of cash before they have the good grace to die.

Whichever way you slice it, a large dose of reality has to be brought to bear when doing retirement planning for clients.

Wealth modelling plays a great part in determining the numbers, (Voyant is our system of choice) but it has really struck me that we, as financial planners, have a huge burden of responsibility to make clients aware of what’s involved in getting to your “number”

Taking this a stage further I got to thinking about whether we work with our clients, for our clients or do we take orders?

I’m sure we are more in category one and two rather than three, but it requires a genuine want to get involved at much more personal level.

David Jones of Dimensional Fund Advisers recently mentioned to me the idea of the one number on the fridge door that should anything happen to the couple, the family could ring the phone number and person on the other end of the phone would understand and be able to sort out the financials.

Does your current financial adviser educate you, train you and make you do what you need to get to retirement in the shape you need to be?

And is he or she your trusted number on the fridge door?

I know Shane Mullins of Fiscal Engineers of Nottingham is rightly focussing on the “trust” part of the relationship between client and adviser and I too believe that this is the key part of our makeup.

I await his tweets with further interest.

So what am I saying?

Guiding clients to retirement requires reality, discipline and commitment from clients and a desire from the adviser to understand the client and their family’s needs and be seen as someone who can be trusted to deliver the plan.

We can’t get to the numbers until we put the time in to establish a relationship with the client that’s based on mutual respect and understanding.

So when your adviser tells you to put more money into your retirement plans because he thinks it is a good idea and it will benefit you and not him, you know you’ve got the right man and can post his number on your fridge.

We need to make the public understand that there is a big difference between going to see someone who will sell you a pension (insert you own local favourite or bank here) to working with trusted adviser who will have a genuine interest in helping you retire in good shape.

One final point; MetLife research would point to income guarantees being very important in retirement for clients and with the continued erosion of annuity purchasing power, is this the way forward?

0131 273 5202 – Cut out and stick on fridge.

Roland Oliver

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