Clare Moffat: Helping clients help their families in lockdown

Advisers can use their expertise to help clients help their families during these extraordinary times, writes Clare Moffat.

One of the least considered impacts of lockdown has been the loss of contact between grandparents and grandchildren.

This is often heart-breaking for all concerned as grandparents provide vital support to their children and grandchildren. Online calls are good but it isn’t quite the same as a hug. But can grandparents help their children or grandchildren in a different way?

The over 70s now are not like the over 70s of previous generations. They are often healthy and busy, sharing their time between family, holidays and volunteering. Many of your clients are able to go on several holidays a year.

However, this year is different – the next time they might be able to go on holiday is when there is a vaccine.

Inheritance tax

While this is inconvenient, it may also carry a tax implication. Let’s take a cruise holiday for example. The typical cost for two weeks in the Caribbean with a deluxe balcony cabin and premium economy flights is around £6,500 – £7,000 per couple.

Many people go on three cruises a year so are potentially spending around £20,000 a year. For clients who might have to decrease their drawdown income, this could be a welcome saving.

But, what about clients who have an inheritance tax (IHT) problem?

Perhaps they are in final salary schemes and some of that income is now piling up in the bank account. They could have children or grandchildren who have been financially affected by coronavirus due to being made redundant or furloughed. Helping them out with cash at this time might be important but longer-term planning should also be considered.

Pension contributions for others are a great way of saving IHT especially when the normal expenditure from income exemption is used. This exemption is technically unlimited subject to the payment being regular, from income and not reducing the standard of living of the donor.

It gives the recipient a pension for the future, saves them income tax (as it is treated as if the recipient made the contribution and it is the recipient’s relevant earnings which are important) and potentially gets them out of a tax trap. So how does it work?

Case study

Martha is a retired doctor who is 72-years-old with scheme pension of £55,000 per year. She was going on two holidays a year with her husband Marco. She wants to set up regular contributions from her pension income.

Even if she did intend to go back to two holidays a year at some point she has plenty of income so that it wouldn’t impact her standard of living. She can also stop contributions at any point.

They have a son David (42) who has three children under 12 and salary of £60,000 per year. This means he is hit by the High Income Child Benefit tax charge which effectively means he is hit with a tax charge that cancels out the amount of child benefit received. To escape the trap he paid more in pension contributions. This reduced his adjusted net income to £50,000 so he escapes the tax charge.

But his wife has been made redundant during the crisis and every penny counts. He has stopped the £8,000 in contributions that he was making so he is again affected by the child benefit tax charge. For the £10,000, he earns over £50,000 he only sees £3,455 after income tax and the child benefit tax charge is deducted (10,000 – 4,000 income tax – child benefit charge of £2,545).

However, if Martha sets up a regular pension contribution for David of £8,000 then that reduces David’s adjusted net income again (total income – gross pension contribution in this case) to £50,000. Now in David’s bank account there will be £8,000 (£3,455 + £2,000 Higher rate relief + £2,545 from no child benefit tax charge) plus a pension contribution of £10,000.

On a family basis that is 121.8% tax relief (£3,200 IHT, £4,000 income tax, £2,545 child benefit tax back).

It is perhaps easier to pick up the phone to clients right now and ask the questions that you haven’t asked before, including about their families.

Helping them to help their family also means that you develop relationships with the wider family and you can act as a point of contact for them for their own financial needs.

Recent research by Quilter shows that demand for financial advice has increased among many age groups amid the pandemic but 18-30s have shown the greatest increase followed by 30 to 45-year-olds and you can be that point of contact. Also, research from Octopus states that two-thirds of beneficiaries do not have a financial adviser and only 50% of advisers have details of their clients’ beneficiaries.

Grandparents might not be able to hug their children and grandchildren during the current crisis but they can help them with today’s financial needs as well as planning for the future.

Clare Moffat is intermediary development and technical team head at Royal London