1. The taxation of death benefits from annuities and drawdown
2. The importance of inter-generational financial planning
3. How to make full use of guarantee periods on annuities
JAN HOLT: Well in terms of death benefits there have been some really interesting changes. We’re going to have a look at the detail later, but I think suffice to say for now that we’ve now, we have a level playing field between the death benefits available from both annuities and drawdown. So some great opportunities where people are actually seeking to protect dependents, beneficiaries, partners or spouses against early death. Conversely, there have always been, and there will continue to be a group of very wealthy individuals who actually see benefits as a good way of passing on that wealth free of inheritance tax, and now under the new rules possibly free of any other kind of tax too.
PRESENTER: Richard Sheppard, a level playing field between drawdown and annuities.
RICHARD SHEPPARD: I agree. And the other issue that we’ve found with it from a MetLife perspective is that the campaign that we’re running, which we’re referring to as real pensions freedoms, is looking really at where the innovation has come from. And with the innovation it’s not necessarily around the products. Jan and I speak about this on a regular basis when we meet up at presentations, and the product providers have had the core components for pensions freedom for many years, some of us as long as 10 years. And what we’ve had now is we’ve had a situation where we can start to use the products that are available to us within the innovation that the legislation has given us. So the adviser can then pick up the appropriate point with their clients towards their client’s need, and speak to that client need with the products that are available.
PRESENTER: So for you it’s a challenge to the advisers rather than a challenge to product providers.
RICHARD SHEPPARD: I think it’s a challenge to both. I mean I wouldn’t go so far as to say that. But certainly we find many advisers, even on the examination criteria. If you look at the examinations of AF3 for example, they’re still a very highly tested section on the taxation of pension death benefits, because the examiner appreciates that it is a significant change, and maybe there is a, not a lack of understanding but a lack of appreciation as to how much that change can benefit a client and their left behind family.
JAN HOLT: Which of course translates to the real world. Because in practice what advisers and planners are now able to do is properly personalise death benefits to meet the client’s needs and objectives through either annuity death benefits or those available under drawdown.
PRESENTER: Well we’ve talked in quite general terms but Jan, I think you’ve got a slide here that talks, can you bring it up and let’s talk through what those major changes to the taxation of death benefits are.
JAN HOLT: OK, sure. So in a nutshell we now have a distinction between what happens in relation to taxation on death before the age of 75 and death after the age of 75. So, for any benefit, whether that’s from a guaranteed income for life product, i.e. an annuity, or whether it’s from a drawdown product, both lump sum and income-based death benefits are payable tax free to any nominated beneficiary. So two key things there: the tax change and of course the ability to pass on the death benefit to somebody other than a dependent or a spouse or so on. Things change once the client reaches 75, because if they die after the age of 75 then the benefit will be taxed. Whether that’s, regardless of whether that’s a lump sum benefit or whether it’s an income-based benefit. And from the current tax year then the taxation of the benefit is going to be at the recipient’s marginal rate.
PRESENTER: And when you say tax, where does this fit with inheritance tax?
JAN HOLT: So this is, I’m talking here about not inheritance tax, death benefits from pensions are broadly speaking now free of inheritance regardless of whether that’s a crystallised or uncrystallised benefit, and regardless of the age at which the member dies. But for taxation on the recipient of any benefit, that’s where the key changes has occurred, and that’s where the age 75 distinction comes in.
PRESENTER: And Richard Sheppard, what are some of the main implications of this then for financial planning?
RICHARD SHEPPARD: Well taking a step back again it’s a change, and it’s a relatively significant change. So one of the things that has been spoken about widely is the issue of longevity, and there has been an awful lot of incorporation within the financial advice process to ensure that as clients live longer they’ve got the certainty of income that they need, but the flexibility of circumstances that they also require in their later life. But if you look at that in a different angle, a different lens, the issue with longevity – and the stats are fairly obvious, I’ve written them down here – there’s a one in two chance that a male will live beyond the age of 85. So you need to protect and put that in as a contingency. But what about those that don’t; what about those that die early, 55 to 75? What are the issues there? So we need to consider there not just their certainty of income, but maybe also some certainty in relation to their death benefits.
So the advice process needs to be considered. And that means maybe looking at it as I said through this different lens where we’re taking a more holistic approach even further to draw down maybe ISA funds or other funds before the pension benefit. And then maybe attack the pension benefit as we approach 75 – the phrase of, the wonderful phrase which I love, of panic dying at age 75 because of the tax advantages that that could give you in terms of the income side of things. But we see really it’s a refocusing. A refocusing because it is the legislative change, the innovation within the legislation which allows you to use the products that are available to deliver certainty and flexibility to a client pre and post this longevity age that we all seem to have got very hung up about.
JAN HOLT: Yes, it’s a really valid point for planning in terms of the order in which the clients’ assets are now utilised to provide for themselves in retirement. I have to say though that whilst the pre-75 tax position is seen as hugely generous – it is, it’s a fantastic benefit; however, when you look at mortality curves it’s predicted that probably less than 10% of people will die before they reach 75. So the majority won’t benefit, but those who do, you know, it absolutely is very valuable.
RICHARD SHEPPARD: But of course we don’t know who that 10% is. Well we shouldn’t know who they are.
JAN HOLT: No, that’s true.
RICHARD SHEPPARD: So we need to include that planning for all.
PRESENTER: But presumably if there is a client who’s very obviously in poor health, there are some, you never want to take a bet but some of those are going to die, but I mean there would be some implications there in the same way there would be if you looked at enhanced annuities?
RICHARD SHEPPARD: Yes, certainly, but again taking this broader standpoint to say there are now some very firm and principle steps that we need to adopt and apply. And many advisers have done this, if not all of advisers, but it’s, you know, I don’t think we can ever tire of reminding of those basic principles: ensuring that all funds are made available to the client, all funds are brought into consideration, all nominations which we’ll probably touch on a bit later are up to date, valid and relevant, and the client is drawing an income which has been fully identified. All of those basic principles then come into play. And then the money is drawn, the income is drawn or withdrawal of capital is taken to substantiate lifestyle from the right pot from a tax perspective as well as an income need and an income delivery perspective.
PRESENTER: Now, sorry, Jan.
JAN HOLT: But I was just going to make the point that there are a couple of little quirks, technical quirks in the system that it’s maybe worth flushing out at this stage. The first is that the tax-free lump sum death benefit from drawdown is actually only available where payment of that benefit is made within two years of the client’s death. So that’s a little quirk in the system, because the two-year rule doesn’t apply to an income benefit from drawdown on death.
So if you’ve found a client in the situation where the shape of the benefits hadn’t actually been decided within that two-year period, then of course you’ve lost the opportunity for a lump sum death benefit free of tax. But what you can do is still pay out that income tax free from drawdown. And of course that could either mean income withdrawals from the drawdown plan. It could mean moving into annuity and taking tax-free income from that. Or it could actually be as simple as well we’ll take a one off income payment from the drawdown plan, and then we’ve achieved the same result as a lump sum tax-free benefit, but having worked around that two-year rule. So it’s a minor planning point but worth advisers being aware of if they do come up against anybody where the benefit still hasn’t been paid out.
There’s another minor point where the legislation allows post April 2015 for any income death benefits from an annuity, so therefore payments under a guarantee period, or payments under a joint life benefit, what we used to call the spouse’s pension, they could actually be commuted into a lump sum provided that they satisfy two conditions. One is that the value has to be less than £30,000, and the other is that the recipient then extinguishes all rights to any value under that annuity contract. But the devil with all of these things is going to be in the detail, so advisers need to check with the provider whether that type of commutation is actually allowed, or whether although it exists in legislation the provider hasn’t chosen to build that into their own terms and conditions.
PRESENTER: Now I know there are, sorry.
RICHARD SHEPPARD: I was just going to point out, revert to your original question Mark, sorry for interrupting but you talked about and you asked around what are we seeing in this post pensions freedoms world? Well the real pensions freedom that we’re seeing clients experiencing is maybe they stepped away through advice from annuities in the early stages, but they are still suffering the quandary, which is I need certainty of income but I desire and want and probably need flexibility. And we’re seeing that more and more and more.
However, with the increased volatility that we’re seeing in the investment markets, at time of filming we’re still away from the US Presidential elections. We’ve seen the Brexit vote earlier in 2016, and it does continue to have a knock-on effect on investment fund values. And if you are stopping from making the decision to say purchase an alternative annuity, and you’re leaving your money invested and you’re drawing down from it, you’re then against all of the other risks of the sequencing of the returns, when you take withdrawals. But if you consider the other issue is if you die when the market is down, the legacy you leave behind is depressed.
So we’re seeing an awful lot of conversations, certainly from our perspective at MetLife, around how do we underpin the value and give us that line in the sand to say right OK, I’ve got that certainty now. So I at least know what the value of income I have, or the value of capital that I have so that I can then start to think differently with the legislation about how I use my pension fund and other funds as well to support my lifestyle going forward.
JAN HOLT: Yes, with death benefits from drawdown you have no certainty either of income, capital value or what’s going to be available on death. With other guaranteed products like annuities you can actually create that certainty of income during life and income or a benefit after death. So you can achieve that. And, you know, you’re right, we’ve got a very long, potentially long period of uncertainty ahead of us. So where clients are actually getting nervous about that, then there are ways of creating a plan that can do the best of both for them.
PRESENTER: Now, there’s a couple of things I want to take very quickly. Firstly I know you’ve mentioned the technical issues there Jan. We do have some links of this programme to some of those technical bulletins where I think there’s those two you highlighted and a couple of others as well so please do keep an eye out for those below the player. The second thing, Richard, you’ve mentioned sequencing risk there. Very quickly can you run us through what you mean by sequencing risk?
RICHARD SHEPPARD: I’ll try and keep this relatively simple, because it’s been spoken about an awful lot in recent years. The sequencing of returns and the challenge that that provides advisers and also consumers is to make sure that you take income when your investment pot is a reasonable value. And all of the predictive tools, well many of the predictive tools assume a linear rate of return. So if you’ve got a drawdown fund today and it is worth a fund value of X, and you draw an income of Y from that, and you achieve an investment return and charges etc. applicable to it of Y, what you should end up with is you should end up with a nice fund that continues through to the date of death. The problem we have is that the sequencing of returns doesn’t act in a linear fashion. We’ve tried to make it do that, but the fund managers can’t do that.
PRESENTER: So some years’ returns are up, some are down.
RICHARD SHEPPARD: Some years you have fantastic returns, other years you have poor returns. And it’s the nature of the markets, it’s what makes it exciting and makes it rewarding in many respects. The downside is of course if you enter a period of say a two or three-year negative rate of return, and you’re still drawing a consistent level of income, you’re not going to have that fund there in later years, because you have taken money out when the market is depressed. Many advisers have used the phrase, and they’ve grown up like I have with the phrase pound cost averaging when you’re investing. This is pound cost ravaging, a phrase that I started using a number of years ago: taking an income from a depressed fund.
So your £100 of income is maybe costing you £110 of what were initial units. And then when the market rebounds you’ve got less units for the market to rebound. And the problem with that is is it can foreshorten the life of the fund, and it exhausts before the client’s life expectancy. You could get lucky and you could draw an income out of 2, 3, 4% when you’re enjoying early returns of 10, 15, 20% heaven forbid. That’s no guarantee by the way. And you could then be very well advantaged. But of course we can’t say what the markets are going to do in the future.
So this issue with sequencing of return is a real challenge. There’s various phrases too difficult to go into during this short interview, but this issue of a safe rate of return based on reasonable assumptions, and it’s that keyword assumption. So allowing the client to say right I understand and appreciate all of what you’re telling me as an adviser. I understand some of the risks and most of the risks. But what real pensions freedoms tells us is that the majority of clients that we’ve spoken to with small to medium funds do not appreciate, have not appreciated or fully understood. It doesn’t mean they haven’t been told, didn’t fully appreciate or understand the risks of drawdown because of sequencing of returns. And it is a complicated area isn’t it, let’s be fair.
PRESENTER: Well one thing that I suppose Jan, we’re talking about an area where you don’t know how long the client is going to live for, you don’t know what the markets are going to do, even if you had some idea of what they’re going to do you don’t know when they’re going to do it, which is obviously an important issue. But then all sorts of things happen in people’s life they don’t expect. So how do you try and maintain this flexibility with certainty? Isn’t there this danger of almost paralysis by analysis? We can go round and round in circles.
JAN HOLT: Possibly, but there is an opportunity to combine a solution that gives the client some certainty for the things that are most important to them, and flexibility for the I guess the what ifs or, and then they can I guess sleep easy that they’re not going to be disadvantaged financially if the markets do turn against them. Because they may use a combination of state benefits, defined benefits and guaranteed solutions, like annuities, to absolutely underpin their minimum level of income to pay the bills, do the weekly food shop and make sure that there’s at least a subsistence level of living for the rest of their lifetime. And then they can layer on top of that the solutions that allow for flexibility both of income, capital withdrawals and indeed passing on legacy.
So that combination approach I think has started to be more widely adopted. And it’s not new to the freedoms. This is something that clients and advisers could have done since the introduction of drawdown. But since the freedoms I think there’s been more of a considered approach to putting a personalised plan together that doesn’t just default somebody automatically into either a drawdown if they’ve got X amount in their pension fund, or into an annuity if they’ve got maybe smaller funds. So it’s looking in the whole at what the client needs, and providing a degree of certainty.
PRESENTER: Now you mentioned annuities there, and I wanted to move on to those specifically, to guaranteed periods and value protection. There’s been some quite big changes there. Can you talk us through them?
JAN HOLT: Yes, well big changes for guarantee periods specifically because in the old world guarantee periods were available for up to a maximum of 10 years.
PRESENTER: And when was the old world?
JAN HOLT: So up until April 2015, and then with the Taxation of Pensions Act we then saw guarantees effectively could be provided for ever more. So in the legislation they can be completely open ended; in practice most providers have put some sort of limit on. So the maximum guarantee available in the marketplace today is 30 years. Which is quite interesting because guarantees used to be about protecting the income; what they can now do is actually a combination of protecting both the income and the original capital that was invested. So what you can do is structure the plan to say well if we put a guarantee period in for 20, 22 or 25 years, whatever the figure happens to be, we can guarantee to this client at least a return of their original annuity purchase price. Really powerful and goes a huge way to overcoming this inherent objection to annuities, which is well they’re great in terms of providing guaranteed income for life, but what if my life isn’t very long? And if I die early the annuity provider’s jumping up and down with joy and my family or my beneficiaries may feel as if they’ve lost out – doesn’t have to be that way anymore.
RICHARD SHEPPARD: And that’s a prime example of where the legislation has innovated and the product is available to adapt. As opposed to fundamentally innovate, it’s just an adaption of what has been there for many years.
JAN HOLT: And then of course within the annuity you can also combine benefits. So you can have a combination of a guarantee period with a joint life annuity. So a solution that will pay out on death of the main planholder both remaining income under the guarantee period and then pay the, I’ll call it the spouse’s benefit because that’s in the common vernacular. And actually that’s another quite interesting decision that people have to make, because there’s this terrible jargon that we call overlap.
And what that actually means is that you need to speak to the client about well we’ve got these two benefits in your annuity, do you want the guarantee benefit to pay out on death for the remainder of the guarantee period, and then we’ll start to pay the spouse’s benefit? Or would you actually like us to pay both of those benefits at the same time? And that’s what we call with overlap. And for a relatively small cost the with-overlap option can provide an extremely valuable benefit, and yet what we find is most advisers aren’t having that conversation with clients.
So a key message here is where you’re quoting annuities with that combination of benefits, get the figures for both, with and without overlap, because you might be pleasantly surprised at how inexpensive it can be to have the with overlap.
RICHARD SHEPPARD: Well again I was just going to highlight the changes that we’ve seen, the innovations we’ve seen within the legislation puts the spotlight again on very, what we would probably call very simple aspects of annuities. But the world has moved on so dramatically since the introduction of drawdown, many years ago now, and the introduction of pensions freedom, maybe some of those basics have been, dare I say not forgotten but overlooked, and it is just an opportunity to revisit exactly what an annuity can and can’t do. Because they are, and they always have been, and I’ve said this many, we don’t offer annuities at MetLife but an annuity is a fantastic vehicle providing the client with a certainty.
PRESENTER: But to your point you made earlier, if you look at the exams now they’ll be full of this stuff, because this is what’s current. If you took your exam 5, 10 years ago you won’t see it again. So what can you do to get yourself absolutely up to speed with these changes, and the implications of them, because there’s so much devil in the detail?
RICHARD SHEPPARD: Yes certainly. Obviously there are examinations, and even though you may have taken your examinations 5, 10, 15 years ago, I took G60 many years ago and I’ve just taken AF3. Why? Because the world has moved on to your point. It helps me hopefully with my point should I pass it. But there are other aspects that you can do as well. There is no reason to dismiss an invitation to a workshop or a session at say the Personal Finance Society quarterly conferences to talk around annuities. We may well have been in this profession for 10, 15, 25 years or longer, and have been dealing with annuities for so long, but those timely reminders are really worthwhile. And there are some excellent sessions run, just to again give you that basic, back to basics granular detail.
JAN HOLT: Yes, I had a look at the statistics around the benefits selected, the guarantee benefits selected under annuities, just to see whether the trend had moved now that we’ve got these longer guarantees. And it’s slow but it is creeping up a little bit. If I go back to 2014, 50% of annuities had a 10-year guarantee, 25% had a 5-year guarantee and the rest had no guarantee period. By the time we get to 2015, the number of 10-year guarantees has gone down, but we’ve still only got 1% of clients choosing a 20-year guarantee, which broadly speaking would offer money back under an annuity contract. At this point in 2016 that’s crept up to 4%.
So we’re still seeing the majority choosing 5 or 10-year guarantees, which feels as if that’s not being a personalised discussion to what the client’s actually trying to achieve. It’s just looking at well it’s quite cheap so we’ll put some kind of guarantee on just in case. However, when you think about the wider objectives for the client, which might be it would be nice to have the opportunity to get, if I’m putting £50,000 into my annuity it would be great to know that I’m going to get £50,000 back out, then that’s where the longer guarantees or the value protection might kick in.
PRESENTER: And what are some of the issues that advisers need to think about when looking at not just guarantee periods but the length of them? Presumably this can throw up some issues for clients, tax issues.
JAN HOLT: Possibly tax. I mean primarily it’s going to be cost versus value. So you would need to look at the cost of the guarantee. And we do have, I’ll put the link against the film rather than try and trawl through the different costs, but we do have a nice little snapshot of the cost of the various annuity death benefit options, so guarantees, spouse’s, value protection and all of those. But if I just take one example, for a 20-year guarantee, where somebody’s investing £50,000 into an annuity, the cost of that guarantee would be £388 a year. So you’re looking at £6.50 a week in order to guarantee 100% return of the £50,000 invested. So it may all be relative to the client, but if you look at cost versus value that feels like something that is definitely worth some serious consideration.
Tax is important more so for the recipient of the death benefits. So where you’re weighing up lump sum death benefits versus income-based death benefits, it’s worth thinking about if the client does die after the age of 75, what’s better for the recipient? Because a £40,000 lump sum will impact their tax position. It may also impact any means tested state benefits they’re in receipt of. Whereas, if you’ve an option to maybe deliver a £4,000 a year income-based death benefit, then possibly that’s more beneficial from a tax perspective if you can keep that within somebody’s personal allowance. But it’s looking at the circumstances of the beneficiary and weighing up what might be best.
And it’s also looking at things like from a control point of view. Say you were nominated your grandchildren to be the recipients, would you actually want them having their hands on a big lump sum which potentially gets squandered, or would you prefer to deliver that as a regular income that you feel they may use more wisely? So it’s horses for courses, lots to think about.
RICHARD SHEPPARD: It is yes.
JAN HOLT: But it does add a layer of complexity to the planning decisions that advisers and clients have to talk about.
PRESENTER: Given that, how close a pair of eyes should you keep on who the nominees are in these cases? How often should you update it?
RICHARD SHEPPARD: Phenomenally, it should be a regular agenda item whenever you speak with your client in my opinion. And to pick up on some of the things that Jan has talked about, you need to consistently remind yourself that the client is at the core. When it comes to legacy planning and death benefits, it’s not necessarily your client who’s going to be at the core. It’s keeping your eyes and your ears and your wits about you as to who those beneficiaries either are or could be, and then making sure that all of those decisions are brought into play.
There was some research done many years ago by one of the investment houses that talked to the point of when your client dies, the investment portfolio you are managing, how many advisers retain control, retain the investment management of that portfolio on death of their client? And the percentage of advisers that lost control was actually quite high, because they didn’t put their arms around the wider family unit. The same is true when it comes to death benefits. Because, you know, it’s important to understand the certainty elements, but you’ve also got to consider the flexibility. And that’s where drawdown that really help, because you can dip into your pension fund. And as I’ve mentioned this real pensions freedom campaign that we are running based on the research tells us that clients are dipping in to some element of ad hoc, or they like the element of consideration they can put into dipping into the pension fund.
So keeping on top of what the client wants, what their nominations should be and could be, and what their beneficiaries may well do. Having that control element, providing that broader view is absolutely vital. And I’m not suggesting that advisers don’t do this, but again it’s another consideration. Post RDR, it’s another consideration of what the adviser’s role is. It’s providing that overarching view of the wider family unit. Like we used to do many years ago, dealing with the client, with their aspirations, what their goals are, getting into that conversation, recording it so that it is available on file subject to challenge at a later point. And then if there are changes and needs need to be made differently on the nomination forms you can address them – because it’s incredibly easy to do that when the client is alive. It’s a bit difficult to deal with a client’s affairs, it’s not impossible but when a client is dead they tend to be more difficult to contact.
PRESENTER: But wouldn’t, what would you say to advisers who say well that’s all very well in principle, but at the point where my client dies there’s the whole family there, so they’ve all got different opinions. Some might like me, some might not. There’ll be all sorts of other advisers that float around and wangle in. It’s just not worth it to end up with a 12-year-old kid who’s got a bit of money. Why would I do that?
RICHARD SHEPPARD: No, your point is valid. But again it’s the professionalism that we deliver into society. Because left to your own devices, left to a population’s own devices, chances are the majority will get it wrong. Without financial planning people will get it wrong. If we look towards the American evidence, our research from America tells us that clients are more concerned about running out of money than they are of dying. They’d rather die than have no money, which is fine, but surely they would want to die with money and passing it down.
Many reasons that clients save in the first place is not just for a rainy day, it’s to look after their children and their grandchildren or great grandchildren. And again this is where longevity comes into play, because 40-year-olds still have parents. Some 40-year-olds have grandparents still alive as well. So there are grandchildren and great grandchildren. And that whole line of legacy, not only does it blossom out. So as an adviser you’ve got some great clients that you can pick and choose from, or prospects as we used to call them, but you’ve also got the opportunity to try and retain control. And this is where you can use other aspects. This is where trust planning comes into play, not necessarily just for the tax planning angles, but for the control from beyond the grave that a client can deliver to the assets that they’ve built and worked hard to achieve.
PRESENTER: Jan, Richard mentioned trusts there, these pension freedoms and the revolution in a sense that started within pensions, are there big implications for trust planning on the back of that?
JAN HOLT: Well there was a school of thought that said the old bypass trust will no longer be needed now that we’ve got changes to the tax regime; however, for exactly the reasons that Richard’s just outlined, there is still an argument to consider a bypass trust where you’re wanting to retain control of who receives the money in a complex family situation. I mean you’ve always got to weigh up the tax that may be, the tax position of the trust versus the tax position if the money goes directly to the nominee; however, it might be worth just again brushing up on knowledge of how the trusts work now, what the tax position is and where they might be appropriate in planning. And again rather than go into the detail I think we’ll just put the link to the…
PRESENTER: As a rule of thumb, it’s worth having that meeting with the client, even if you decide to change nothing.
RICHARD SHEPPARD: Correct, exactly right. And again it’s a sad commentary on society as we’re seeing more and more marriages ending up in divorce, second, third, fourth marriages potentially with children and complicated child scenarios. And it’s very distressing. We see a lot of distress within families, we’re told through advisers, where the money ends up in the wrong hands at the wrong time, because of the – how do I word this politely? Just the lack of…
PRESENTER: The lag between paperwork and intention.
RICHARD SHEPPARD: That will do, thank you very much. Yes, but the paperwork doesn’t always fall in line with what the client actually wanted to achieve.
JAN HOLT: No, and I think there are some simple questions you can ask to get that particular, open up that conversation. You can talk to the client about what or who are they most interested in protecting, who should benefit, how do you feel about how they could handle a lump sum or an additional income, and then you start to get into the more detailed specific questions, like what’s their tax position, what are their other circumstances and so on. But you can open it up I think in a fairly non-technical way before you start to bamboozle the client with the technicalities of.
RICHARD SHEPPARD: Definitely on the agenda.
PRESENTER: We are almost out of time, but Richard, you were mentioning earlier the importance of ISAs. What I wanted to do was just get you to run through very quickly what the tax position of ISAs is on death. Because if these are going to be, if this is part of the package that you’ve got as a client, what happens to the money?
RICHARD SHEPPARD: Well when it comes to ISAs, you know, you cannot dismiss the fact that there is a huge amount of money invested into ISAs. We could have another 30-minute conversation as part of this interview as to where that money is invested under the ISA framework, but let’s park that for now and just talk about the ISA framework that we have in place. Again a significant change was around, in fairly recent times, is around the way that ISAs can be transferred between spouses on death. And that is a key and critical change, because that allows a surviving spouse, a widow, widower, to inherit the existing fund that’s been built up by the deceased.
PRESENTER: And that’s automatic now is it?
RICHARD SHEPPARD: Correct, that’s right. However, there is a dwell period where between the death and the transaction of moving the money across, that period of time the growth is not tax free. So in terms of getting the administration up to speed it’s obviously important if you are in a growth, and bear in mind there is an awful lot of ISA funds held in cash, but if you do have growth within an ISA during the date of death and the date of transfer, that growth is not free from a tax perspective. So in order to shorten that timeframe that is key and vital if you do experience growth.
PRESENTER: If incidentally there was a big loss on that ISA could the person who then got their hands on that offset that against something else?
RICHARD SHEPPARD: No.
PRESENTER: All right.
RICHARD SHEPPARD: You can’t have it both ways, unfortunately. So you’ve got that position. So the transfers between spouses on death is now free from inheritance tax. So you have got that inheritance of an ISA allowance from the spouse.
PRESENTER: Thank you very much. Well we’re pretty much out of time, but if there were a couple of key points that you’d want to leave us with from this what would they be, Jan Holt?
JAN HOLT: I’ve two key points. The first is that advisers should understand and start to utilise those modern annuity death benefits to create a personalised plan for the clients who are seeking that certainty. And the second point is of course once you start to talk to clients about nominees, beneficiaries, who they want to be in receipt of benefits, then that opens the door to a whole new opportunity about estate planning. So wills, power of attorney, inheritance tax planning. So it’s not only I guess a consideration within the retirement plan, it is an opportunity to widen out and, coming back to your point earlier, start to think about that wider financial planning across the whole family or set of generations.
RICHARD SHEPPARD: So for me it’s probably threefold. The first one is putting the client at the core and asking the right questions. Just reinvigorate those conversations and have that debate and discussion. Because it’s not about surviving, some clients do die early. So you do need to have that blunt conversation. The second one is around just considering which assets the client draws. Once you’ve established exactly what certainty of income is they need, then work out where you take that money from. And the third and final one is it’s the legislation that is innovating quicker than the products. And just maybe take a moment to appreciate what that innovation in the legislation is and take onboard some of the technical changes because they might be slight but they are significant.
PRESENTER: We have to leave it there. Jan Holt, Richard Sheppard, thank you both very much.
RICHARD SHEPPARD: Thank you.
JAN HOLT: Thank you.