Bob Champion: Caring for ‘the average person’

The surprising snap general election may open up a number of debates around care funding, inheritance tax and pension tax relief, says Bob Champion, but funeral planning is unlikely to receive too many headlines.

I recently sat in on a discussion as to whether it was possible to produce a care product that would fund care fees and appeal to the public. What interested me most was the debate around who would buy such a product and a tension immediately became apparent.

Those with significant wealth and income probably do not need such a product while those with less wealth probably have insufficient funds to be able to afford the product or would be unwilling to purchase it in the first place.

This is the problem with ‘the average person’ when it comes to funding care, retirement and many other things. They do not have, or believe they do not have, the means to save for, or insure against, those things we as financial planners believe they should. Yet often they are the ones most in need of such products.

Whatever emerges after next month’s election, the current care system cannot be described as fair. The poorest have their care needs funded by the State. It could be argued the wealthiest self-funders receive tax relief. The reduction in their estate as a result of the care costs incurred results in a reduction in inheritance tax paid.

Those in between receive no help from the State, however. It is also argued that a further ‘tax’ is paid by self-funders of care in that they subsidise the care costs of those whose needs are funded by local authorities.

Another political question to be answered is whether a new government will revisit the issue of pension tax relief? If tax breaks to help with the care-funding conundrum really are on the agenda, they may well do so. What is given to one person as a tax break, however, must be paid for somewhere else.

We complain about the complexities of pension tax relief but this is a system that enables the poorest to receive tax relief at 20% on inputs yet pay no tax on withdrawal, while wealthier individuals receive up to 60% tax relief on pension inputs and can withdraw the money at 15% or less. They can then pass on the balance of the pension fund, on death, to their children or grandchildren when it will be taxed at their marginal rate when withdrawn.

Hopefully any incoming Government will realise that care funding, inheritance taxation and pension taxation are all interconnected and need to be reviewed together so that the impact is perceived to be fair to all.

One area that is often overlooked in all of this is that of funeral costs. Those of us who have experienced a recent death in the family will have been surprised at how expensive funeral costs have become. This is in part due to local authorities increasing their fees for their various services that must be used.

Stealth tax?

Could this be described as a stealth tax? Funerals costs can be offset against inheritance tax liability. Again, is that a post-death tax relief for those who can afford to pay for their funeral, which is not available to the average person?

The average person is therefore facing increased funeral costs. Many advisers do not get involved with funeral plans because they are unregulated products. Yet this is the very reason why I believe an adviser should be involved.

Not being regulated means many funeral plans are not backed by any compensation scheme. If a provider of such schemes were to be liquidated, the investor could lose all their money. Others hold investments backed by regulated companies so are therefore subject to the Financial Services Compensation Scheme.

A Private Members’ Bill requiring prepaid funeral plans to be regulated by the Financial Conduct Authority was going through Parliament – with its second reading due on 12 May. This will not now take place, however, with the Bill lost due to the calling of the general election.

An ‘average person’ often has insufficient pension wealth to provide lifetime income to meet their spending needs. They therefore look to use their housing wealth to close the gap. There are lot of channels pushing funeral plans that offer no protection.

Should financial advisers – whether looking at how to invest and use the proceeds of a house downsize or equity release – be discussing whether a funeral plan is also required? A regulated financial adviser will take into account the protection their customer will receive, unlike other distributors of funeral plans. It is certainly something that should be considered.

All things considered, this general election could have many consequences for how financial advisers deal with the average person.

Bob Champion is Chairman of the Later Life Academy