Andy Woollon: Protection should be a keystone of any retirement plans

Convincing clients to underpin their assets with protection may be difficult but, argues Andy Woollon, it is likely to turn out to be worth it - for both client and adviser

I have been speaking recently about using protection as part of a retirement strategy – a centralised retirement protection process, if you like. The old adage about protection providing the foundation for sound financial advice – PIPSI anyone? – has never been truer, especially at a time when stockmarkets may be viewed as volatile and uncertain.

This is because protection can help de-risk clients’ assets by providing diversification away from stockmarket-linked investments and underpinning existing investment growth, while protecting your adviser income.

Protection can be considered as an alternative and complementary asset class to your clients’ investments during retirement. I realised this when administering my uncle’s estate some years ago. Like many retirees at the end of 1999, he took his tax-free cash and invested £75,000 of it into a balanced managed fund. By the time he passed away, in 2016, it had grown by a paltry 22%, due partly to poor market performance and partly to poor fund management.

However, my uncle also had the foresight to take out £200,000 replacement life cover, which was claimed. When I took a closer look, I calculated his total premiums had been £76,400, meaning his notional return had been more than 160%. Clearly my uncle had not planned on dying at the age of 76 but, even if he had reached life expectancy, the premiums would still have amounted to half the sum assured.

This set me thinking – what other asset classes would have given the same return for the same risk over the same period? What else could provide this sort of legacy on death for dependants? I couldn’t find one.

I am not suggesting using protection in place of investments, because the main risk is if clients cannot afford, or stop paying, their premiums, the policy ceases and they get nothing back – modern day guaranteed whole of life has no investment element. Used alongside investments, however, to preserve their estate or to create a legacy for dependants, protection can add real value. Let’s take these one at a time.

Preserving the estate

There are a number of ‘life stage’ events during retirement where the value of a client’s estate can be eroded by various costs. The most widely acknowledged of these is rising inheritance tax (IHT) receipts – driven by property and investments – which are now at all-time highs.

Despite the phasing-in of the residence nil-rate band (£150,000 each in 2019/20), many clients either misunderstand how it works, will not get it in full, overlook future estate value increases, or own buy-to-let properties that will not qualify – according to a YouGov survey, for example, two-fifths (39%) of landlords are retired and two-thirds are over 55.

Additionally, there are many clients who believe, since the inheritable ISA rules were introduced in April 2015, that ISAs are IHT-free, which is not universally the case. They are on first death for married couples and civil partners because of the IHT spousal exemption, but they are not for unmarried couples – typically divorcees or widowers in a relationship. Yet many clients continue to fund significant ISA pots, which become liable to IHT on second death.

Other examples using guaranteed whole of life that could be presented as alternative solutions to help preserve clients’ estates include making large gifts to grandchildren for education fees, property deposit and so forth – which may be funded by equity release – to replace these monies so their adult children receive the full estate value (and maybe to protect the potentially exempt transfer).

Another example could be replacing long-term care and accommodation costs of £100,000-plus – assuming the proposed £72,000 care-cap is introduced in April 2020 -either to replace the costs incurred on first death, or to generate a sum so that the surviving spouse has funds in case they need care.

Creating a legacy

Grandparents often use a guaranteed whole of life policy in a discretionary trust to create a legacy for the next generation. Providing spare income (or capital) is available, it provides a great opportunity to make use of the annual IHT gift exemption over many years.

This is because it provides control over whether to pay the premiums – though the parents could pay – and the trustees control what is paid out and to whom, plus you get to build relationships with three generations of the same family, which means you are more likely to keep family assets under your advice.

This approach can also be used for clients who are concerned that, on the death of the main pension recipient, the spouse’s pension (typically 50%) may be insufficient to meet their income needs – for example, those who are unable to take a transfer from a defined benefit scheme or who have small pensions. Using cashflow modelling to show the shortfall on death, annuity rates can then be used to convert this to a value, which can be used as the sum assured.

Access and control

In all these examples, a guaranteed whole of life policy written in trust – maybe with indexation – will provide reassurance while continuing to give access and control of assets. While there are other ways in which these events could be mitigated, sometimes it is about presenting alternative solutions to clients that are both simple and guaranteed to be paid out on death.

The premiums may, however, be prohibitive, even after demonstrating the value being created. So, where appropriate, you could consider using convertible term assurance. This may provide the cover a client needs, at a more affordable price, with the flexibility to convert to a guaranteed whole of life policy in the future, with no further medical evidence.

Some may think of this process as pure ‘centralised retirement asset protection’ but, for me, this forms the basis of a solid repeatable process that goes much further than simply protecting assets.

Of course, getting clients to realise they should underpin their assets with protection can be difficult, but it is worth remembering that clients are not buying a policy – they are buying peace of mind and the reassurance that their assets will be passed on intact to the next generation.

Andy Woollon is a wealth specialist at Zurich