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How do pensions and property best fit into your clients’ retirement and estate planning?March 20I9

2 March 2019

Foreword

But while we’ve seen retirees make use of the most high-profile new flexible approaches, many have only been taking advantage of half the opportunities available. Few realised that within the detail, there were even more opportunities. As well as releasing retirees from the compulsion to take out an annuity and allowing them to invest or spend their pension savings at will, the freedoms also made those savings much more tax-efficient should they be passed on as an inheritance – which has big implications for estate planning.

Before April 2015, most types of private pension didn’t count as part of someone’s estate for inheritance tax (IHT) purposes. However, any unused drawdown funds that could be passed on as lump sums were taxed at a punitive 55% rate when the deceased was over age 75. This is some way above the standard IHT rate of 40% on the estate above the £325,000 nil rate band. But thanks to the freedoms, pensions passed on are now taxed at the marginal income tax rate of the heir receiving them (if taken as income or lump sum), tax-deferred if the beneficiary keeps it in a pension rather than drawing on it, or aren’t taxed at all if the benefactor dies before 75.

For many individuals, property will still be very IHT efficient, and likely to be worth more than their pension and other wealth such as ISAs and stocks and shares. Therefore this change in the inheritable tax treatment of pensions will make little difference. Their property will likely still be the most valuable asset they can pass on, and may not incur IHT if it is under the nil rate band and residence nil rate band, or appropriate planning is put in place.

But there are plenty for whom that won’t be the case; particularly, counterintuitively, if their property is their most valuable asset but likely to be subject to IHT. For many approaching retirement, pension pots could be a more tax-efficient asset to pass on as an inheritance than property or savings.

This is particularly relevant now as we are in the midst of a boom period for IHT receipts. HMRC received £5.2bn in IHT in the last tax year. It has been rising rapidly over the last seven years, and is nearly double the £2.7bn taken by the Treasury in 20111. Put simply, plenty of families may be paying far more tax than they need to on their estates, because they aren’t making the most of the pension freedoms.

When then-Chancellor of the Exchequer George Osborne unexpectedly announced the largest change to the pension system seen in generations during the 2014 Budget, most immediately grasped that the reforms would give retirees more freedom over how they used and invested their retirement savings than ever before.

1 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/730110/Table_12_1.pdf

How do pensions and property best fit into your clients’ retirement and estate planning? 3

Andrew Tully Technical Director

at Canada Life

The potential of pensions being used as an inheritance could also be profound in other ways. Instead of using property as a vehicle for passing on wealth through inheritance – which often incurs its own expense through administrative costs required to actually access its value – beneficiaries could receive either lump sums or access to income, potentially tax-free where the member passes away before age 75.

Before the freedoms, pensions were a simple tool when it came to estate planning almost equivalent to a pawn in chess. Typically people cashed in their pots for an annuity which could only be passed on to a spouse when they died, subject to the right guarantees being in place. Those who took a different approach and had excess savings remaining when they died (after age 75) left their beneficiaries with an eye-watering tax bill. What the freedoms have done is transform pensions into something like a knight and a queen all in one – a flexible tool which can be used in all manner of ways to pass on wealth to the next generation, or even as a vehicle to rationalise other assets for efficient estate planning.

Wider take-up of a new approach could help to alleviate growing issues such as the retirement savings gap, with many of the ‘in-between’ generation (who neither benefited from any length of time in a defined benefit (DB) pension, nor auto-enrolment into a defined contribution (DC) pension) facing retirements with meagre savings. Or it could help provide younger generations with deposits to get on to the housing ladder themselves. Some have even speculated on the prospect of pensions ‘cascading’ through the generations, passed down the family tree as a way of bolstering bare pension pots or preserving healthy ones as a tax-efficient nest egg to go on to the next generation.

To do this, a lot depends on the willingness and ability of retirees to preserve their pensions and draw on non-pension wealth for income. But while there have been some reports from advisers of clients taking advantage of the tax opportunities created by the pension freedoms, by and large most over 55s do not seem to be doing so.

Not everybody will be in a position to draw on other assets to finance their retirement. But for those that are, it is unclear whether their current behaviour is due to poor awareness of the tax changes, a reluctance to reorient their retirement income arrangements around drawing on their non-pension assets first, or a lack of advice. Importantly, more flexible solutions being provided will make it easier for retirees to treat their assets holistically in this way.

To find out what is driving consumer behaviour, we conducted research to establish the following:

• How much knowledge of the pension freedoms tax changes there is;

• Whether consumers and advisers have changed their behaviour as a result; and

• How open people are to making the most of the changes.

There are some real positives in our findings. The research suggests that, while there is still some way to go on public awareness of the opportunities on offer, advisers are largely singing from the same hymn sheet on the advantages offered by the changes, and have shifted the advice they offer as a result. While many consumers in or nearing retirement aren’t yet fully convinced as to the merits of changing their arrangements to take advantage of the changes, recommending more flexible pensions solutions appears prudent. Not only may some of those currently in retirement change their mind and want to make use of the changes down the line, plenty more of those in younger generations appear more enthusiastic to do so in the future.

We hope you find the results interesting and informative.

4 March 2019

Key findings

Our research has found four clear findings:

Traditions die hard. Many people are still wedded to property as the most important (and, in their eyes, most tax-efficient) asset they can leave as an inheritance. This could mean they are unwilling to draw on property wealth for retirement income as a result.

Half of over 55s (50%) believe that property would be the most tax-efficient asset to pass on as an inheritance; just 6% believe their pension would be. Only 32% of over 55s who are aware of the changes are likely to consider using non-pension wealth to generate income in retirement so their pension pot remains untouched.

In many cases, these beliefs may be justified, especially following the introduction of the residence nil rate band. But if someone’s estate is likely to be subject to IHT and they are concerned about leaving the most they can to the next generation, preserving their pension and drawing on their property and savings wealth for retirement income instead could be a better approach. Products are available now that allow people to take a much more flexible approach to their retirement, incorporating other savings and investments.

There is scepticism around the tax changes among the over 55s. But there appears to be more enthusiasm among under 55s who are aware of the tax changes for amending their plans to maximise their pensions. Coupled with a more open view of drawing on property wealth for retirement income (9% vs 3%), this suggests that younger generations are more at ease with considering their wealth holistically.


Expectation of main source of income in retirement

In turn, encouraging more honest conversations between benefactors and beneficiaries could give benefactors a better understanding of what inheritance means to the people who will be receiving it and what their priorities are, and open them up to income arrangements they wouldn’t have considered otherwise. Two-thirds (66%) of under 55s who expect to receive an inheritance or a gift that would otherwise be inherited have not discussed the value of this with their benefactor.

Notions of families starting to pass their pensions down through the generations are likely unrealistic in the medium-term. But if these findings are anything to go by, there may be much more promise in the long-term of pensions-as -inheritance becoming a norm.

So what should advisers take away from this research? Five things present an opportunity to help your firm show the value it adds, and help your clients make the most of these changes:

6 March 2019

Blind to opportunity

It would be a mistake to portray pension freedoms as a move that definitively makes pensions the most efficient asset to pass on as an inheritance. Pensions can be more or less IHT efficient depending on all sorts of variables, from the income tax rate of the heir, to the age at which the person leaving it passes away.

With this complexity, it would be unrealistic to expect people to know one way or another what the most IHT-efficient asset they own is. But although the pension freedoms tax changes have been in place for nearly four years, people still broadly don’t know about them or the opportunities they might present. This means plenty will miss out on their potential benefits.

Awareness of the tax changes

However, advisers overwhelmingly say their clients are aware of the tax changes. Nine in 10 (90%) of IFAs surveyed say their clients know of the IHT implications of the pension freedoms – with more than three in five (62%) very aware and over a quarter (28%) slightly aware.


Property still seen as king

Perhaps because of the low levels of awareness around the tax changes, most still see property as the gold standard for tax-efficiency as an inheritance asset. And it follows through in their plans.

Proportion of over 55s who believe this asset is most tax-efficient to pass on as an inheritance

Proportion of over 55s who say this asset is the most valuable they plan to leave as an inheritance

Proportion of over 55s who plan to leave this asset as an inheritance

Proportion of over 55s who plan to leave this asset as an inheritance and believe it will incur IHT

8 March 2019

Not only do a majority of over 55s see property as the most tax-efficient asset they can pass on, overwhelmingly, it’s one they plan to leave (92%) and consider to be the most valuable asset they will pass on (87%).

For some groups, this may well be the case – those who have retired with DB pensions that they are receiving an income from will likely be in a position where property is their most valuable inheritable asset. So too will many who have already started drawing on DC pensions. But the low level of over 55s who even consider pensions theoretically to be the most tax-efficient asset is telling. Even the highest earners – for whom it would be the most beneficial – don’t see it as such, with just 16% seeing pensions as the most tax-efficient.

It is unlikely that as many as 43% of over 55s will end up incurring inheritance tax on their property. The average house price as of December 2018 was £212,0002. Couples leaving their estate to children have a potential IHT threshold of up to £900,000 – a figure that will increase to £1 million by 2020.

These misconceptions offer advisers an opportunity to open up conversations with less financially savvy consumers who don’t already receive advice. A lot of people think property is the most tax-efficient asset they can pass on and expect their property to incur IHT.

There is promise in pointing out to these potential clients that an adviser could perhaps help them to save their beneficiaries thousands of pounds in unwanted IHT – or to maximise their income, if some are planning their retirement expenditure on the basis of an IHT bill that isn’t going to come. Estate planning is an area ripe for advice.

More than 2 in 5 (43%) think their property will incur inheritance tax.

2 https://www.nationwide.co.uk/-/media/MainSite/documents/about/house-price-index/2018/Dec_Q4_2018.pdf


The advice side

The awareness of the general population stands in stark contrast to the feedback we received from advisers: indeed, there is a really good news story here for the advice sector. Advisers have embraced the pension freedoms reforms wholeheartedly.

Darren Cooke, a financial adviser and director at Red Circle Financial Planning: “Previously, the advice to clients would have been to take the money out of their pension and leave their ISAs. That’s flipped on its head now: you tell clients to take the money out of their ISAs and other investments and leave their pension until last, because of the obvious protective nature of a pension fund. I’ve always been comfortable telling clients to channel funds into their pensions, but now I’m telling them there is an extra reason to do that, because of the advantages pensions have when it comes to inheritance tax.”

Advisers seem to also be open to the potential of the freedoms to allow more flexible inheritance planning strategies, such as recommending DB transfers. Though advisers will be cautious in this area (which has been subject to greater regulatory scrutiny in the last year), many say they will consider it to allow clients to benefit from improved death benefits available in annuity or drawdown contracts. These are benefits that they wouldn’t have otherwise been able to benefit from, such as the ability to pass on a larger lump sum to their spouse and future generations.

Martin Bamford, a chartered financial planner with Informed Choice and founder of Bamford Media: “We only advise clients to consider DB transfers where we can construct a comprehensive financial plan and demonstrate over a lifetime what is going to be the best thing for people. Death benefits alone are not a good enough reason for most people to lose those guarantees and move to a personal pension: if death benefits are driving that decision, it’s important to look at the cost of insuring and providing an equivalent death benefit. If you are going to give up that guarantee and move money from defined benefits to defined contribution, you really have to consider what is going to be left for the death benefit when you die and whether it might be cheaper to take out life insurance instead.”

7 in 8 advisers have changed their advice to clients in light of the IHT changes.

2 in 5 advisers would recommend DB transfers to create flexible income strategies for clients.

10 March 2019

In contrast to the population at large, advisers report real enthusiasm for taking advantage of the pension freedoms IHT changes among their clients.

Andrew Pennie, marketing director at Intelligent Pensions: “The pension freedoms have certainly put a different dimension on estate planning. It’s captured the imagination of clients, particularly those with higher net worths, who’ve picked up on the fact they can pass their pension funds down in a way that wasn’t possible before. However, we’ve found that this has typically been the case for more sophisticated clients, who are more conscious of their pension savings, and possibly more attuned to these opportunities than the general public.”

That the rule changes garner interest among those seeking advice is possibly of little surprise, because our research shows just how important inheritance planning is to them.

Inheritance planning has a big impact on their overall wealth planning as well. On average, advisers spend

43% of their time discussing IHT and intergenerational wealth planning

with their clients.

Martin Bamford: “I would say clients are pretty polarised on inheritance tax planning. Some want to do everything they can to avoid paying a single penny to the tax man and they want to maximise the inheritance for children and grandchildren. Others take the view that their children and grandchildren are going to inherit far more than they ever dreamt of inheriting from their parents and actually the inheritance tax they pay is a relatively small proportion of what they are going to end up with. I think there is a growing realisation that people are spending lots of their wealth before they die on things like care fees, so the amount left for inheritance in some cases just isn’t there.”

The disconnect in enthusiasm between advised clients and the general public could indicate a rich seam in estate planning as a promotional tool for new clients. Certainly, our broader consumer findings indicate an untapped market for advisers among less financially-preoccupied retirees. We know they are less attuned to the benefits of the IHT changes. Advisers could yet find switching them on to what the pension freedoms changes could offer them may reap rewards in expanding their customer base.


People’s plans for retirement

Over 55sAs might be expected, given most people aren’t aware the pension freedoms changed the IHT treatment of pensions, most haven’t changed their financial plans as a result. This goes especially for those over 55 – the majority of whom, in all fairness, will likely have had set expectations for their retirement income arrangements. Many are still adjusting to the new landscape of drawdown pensions as a norm, the ability to withdraw funds at will and access their pots before they retire.

For the moment, the trend is still for over 55s to draw on, rather than conserve, their pension funds.

This trend is confirmed in our research: not only are over 55s not preserving their pensions, but most are still planning to draw on their private pensions as their main income in retirement. This is especially the case among the most well-off in this group, who would be most likely to have pensions valuable enough to make the most of the tax changes.

Another factor needing consideration is that alternative sources of retirement income aren’t relied on all that much currently. This could reflect the popularity of private pensions (which are, after all, culturally well-established as a retirement income solution), but it may be a sign that not many people are asset-rich enough to rely on non-pension income in retirement.

Property wealth is likely the most commonly held asset that would be large enough to substitute for private pensions for most. But it’s a particularly uncommon planned source of income at present for over 55s. One issue is that property, and the idea of drawing on it for income, is a deeply emotive topic – particularly for the ‘property-owning generation’ of over 55s. We have seen increased comfort among consumers with using home finance options, such as equity release. But many are still wary.

Andy Clark, a financial adviser at West Frazier Limited: “Recommending equity release is always a difficult conversation to have. A lot of people saved into their pension all their lives with the expectation that would provide their income in retirement, and spent their whole lives trying to get rid of their mortgage. I think psychologically putting another mortgage back on their home is too much for some people.”

Over 55’s expected main source of income in retirement

All Those with a DB pension

Those with a DC pension

Those earning over £45k

12 March 2019

Given the existing attachment to property as the most valuable and tax-efficient asset to be passed on as inheritance, many won’t be starting from a position of enthusiasm on the idea of drawing on property wealth to preserve their pension. But for plenty, relying on this wealth to support them through retirement could well be the best strategy: it would allow them to leave the most they can to the next generation. The challenge for advisers will be to overcome these emotional hurdles for those who would potentially benefit most from the idea of viewing their wealth holistically.

What we don’t know is how many of these are likely to have pension savings left when they die, or how substantial they intend their pensions to be when they pass them on. For one, our annual research in the Retirement Sentiment Index3 consistently finds that people approaching retirement age underestimate their life expectancy – and by a factor of several years (five among men, six among women in our 2018 Index).

Perhaps promisingly, a high proportion of over 55s say they plan to leave their pension as an inheritance – one in four (25%).

3 http://documents.canadalife.co.uk/retirement-sentiment-index-surviving-market-volatility.pdf


Under 55sOur research reveals a gulf in attitudes between the generations, which could help overcome reluctance among older people to reconsider how they use their assets.

All in all, under 55s are much more enthusiastic about the idea of flexibly arranging their finances to ensure the best inheritance, and about drawing on a wide range of income sources to support them through retirement.

Under 55s’ expected main source of income in retirement

Fewer under 55s expect private pensions to be their main source of income in retirement (40%, compared with 58% of over 55s). This gulf is even wider for the most well-off; just 48% of under 55s earning over £45,000 expect to rely on private pensions in retirement, compared with 75% of over 55s earning the same.

The main generational gap is in those who plan to rely on savings and investments or on their property. This could be down to the greater likelihood of over 55s having the guaranteed income of a DB pension, with under 55s more likely to have DC pensions.

There is also the hint that younger generations are more open to using property wealth for income in retirement. Almost one in 10 (9%) under 55s say they expect property wealth to be their main source of retirement income, compared with 3% of over 55s. This is in line with previous research that we’ve done – we found similar willingness in our Home Is Where The Wealth Is report last year4.

This suggests there are softening attitudes around property wealth as something that can be drawn on

for retirement income. If older generations are nervous on the idea of using their home’s value as an income, perhaps because they have mentally categorised it as the main asset they will leave as an inheritance, it may be worth opening up conversations with younger relatives in financial planning.

If younger relatives are at ease with the idea of treating assets holistically with the aim of ultimately leaving a larger legacy, they can help to reassure older relatives who may be working on incorrect assumptions of what their family members are and aren’t comfortable with.

Andy Clark: “A lot of people have saved into their pension all their lives to create retirement income and see their mortgage as something they have spent years trying to get rid of. So it often takes more than one conversation for them to be open to the idea that reversing that approach and using the property to generate income instead could leave them and their families better off.”

Just over one in five (21%) under 55s believe savings or investments will be their main income source in retirement – compared to less than one in 10 (9%) over 55s.

All Those earning over £45k

4 http://documents.canadalife.co.uk/home-is-where-the-wealth-is.pdf

14 March 2019

Are people willing to change their plans?

How interested are people in the changes when prompted?

In 1986, former Chancellor of the Exchequer Lord Roy Jenkins famously described IHT as “broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.”

Our research didn’t touch on how much benefactors trust their beneficiaries. But it did find that many of them may well be on track to pay more IHT than they need to. This is because many over 55s don’t seem interested in the potential of the pension freedoms tax changes.

We asked if over 55s were likely to change their financial plans after finding out about the changes. Of those we asked, the advantages offered to pensions as an inheritance by the tax changes are less applicable to about a quarter:

• the 6% already using non-pension wealth to generate income in retirement, and

• the 20% who have tapped into their pension for income.

However, provided a retiree has a flexible pension product, there is nothing to stop them from changing their minds to preserve its value.

Likelihood of considering using non-pension wealth to generate income in retirement so pension pot remains untouched

Over 55s aware of the pension freedoms tax changes

Those with a DC pension

Those with a DB pension

But of the remaining three quarters who are not generating income in retirement, over two-thirds (68%) of over 55s either say they aren’t likely to change their plans (36%) or have little view on whether they are likely to either way (32%). Just under a third (32%) say they are likely to consider using non-pension wealth to generate income in retirement so their pension pot remains untouched.

This is, to be fair, a relatively even split between the enthused, the uninterested, and the apathetic. But while a third is a sizeable proportion of over 55s, this still leaves plenty who seem less willing to rationalise their estates in an IHT-efficient way. What we don’t know is whether this is a case of people not having the assets to take advantage of the changes, or an aversion to the administrative effort required.


Inheritance tax is a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.

Lord Roy Jenkins, 1986

Martin Bamford: “We find the clients most open to looking at their pension as an inheritance vehicle tend to be those with a greater net worth overall and with a multitude of different assets they can draw on, such as savings, investment accounts, pensions assets, and property. That blend of assets gives them choice and flexibility around where they can draw from and which order they can draw in, and therefore they can plan more effectively.”

Our research indicates one reason. Among under 55s, we find more openness from those already aware of the pension freedoms tax changes to alter their plans.

With a much greater willingness among younger generations to plan long term on this basis, it could be that those already over 55 who are closer to the point of having to depend on their planned arrangements don’t have the flexibility in their asset portfolios needed to make the most of the changes.

This offers promise for the potential use of pensions as an inheritance wealth vehicle in future. But it also shows one area advisers could explore, if older prospective clients seem tepid on the changes: finding more flexible arrangements and structures for their retirement income.

A majority of under 55s aware of the changes say they have already altered their financial arrangements to take advantage of them.

16 March 2019

A lack of awareness of the tax changes included within the pension freedoms is likely the decisive factor on why so few consumers have changed their plans. Even if awareness shifts, the complexity of altering income arrangements to draw on non-pension wealth for retirement income may well be an equally significant factor.

But another simple measure indicates that many people aren’t even changing their arrangements to use the simplest strategies for leaving a tax-efficient inheritance.

Are people interested in changing their income arrangements full stop?

Yes, I have given gifts that I would otherwise have left as an inheritance

Yes, I plan to give gifts that I would otherwise have left as an inheritance

No, I have not and do not plan on giving gifts that I would otherwise have left as an inheritance

Have you given, or do you plan to give, gifts you would otherwise have left as an inheritance, in order to avoid the beneficiaries having to pay inheritance tax?

Gifting is one of the most basic steps a benefactor can take to ensure their beneficiaries potentially pay less tax on their estate after death. It is a simple transfer from one person to another (though with some considerations around amount limits and how long gifts can be given before death without incurring IHT).


Gifting is much more prevalent among higher earners (62% of those earning over £45,000 have given or plan to give gifts they would otherwise have left as an inheritance). But even this shows less of a tendency to orient income and asset arrangements around leaving a tax-free legacy than may be expected. Our results show more than a third (38%) of the highest earners seem unwilling to take advantage of the simplest way of doing this.

This reluctance to gift may be that many don’t wish to be left out of pocket in the event of the worst happening. For example, some may be unwilling to make outright gifts, perhaps fearing they might need to draw on their assets in the future to cover potentially expensive commitments, such as long-term care.

Darren Cooke: “I think people can be fearful of gifting. Sometimes it is an emotional conversation, which is driven by concerns about giving up control of their money. People wonder about circumstances where they might need the money – if they need to cover care costs for example. Cash flow planning tools are one way to reduce people’s reservations about gifting and trusts.”

One way of easing these kinds of concerns could be to recommend solutions that provide the flexibility of being able to make a gift, but potentially access it in future: the best of both worlds!

Advisers could consider estate planning techniques such as putting assets into a trust rather than making an outright gift, helping clients to reduce tax bills. The options of fixed or flexible payments offer increased flexibility during retirement. Some products allow retirees to receive payments so they won’t be left struggling financially, should the unexpected occur.

Neil Jones, Wealth Management and Tax Specialist at Canada Life: “Trusts are a valuable tool when considering estate planning. They allow someone to gift money thereby reducing the value of their estate, which is turn can leave more money to the beneficiaries and also help with their estate planning by keeping funds outside of their estate. If someone is unsure about gifting then trusts can allow them to retain access to certain benefits - whether this is regular payments or access to capital payments. This can be valuable if they may need access in the future, may be for long term care provision or to supplement retirement.”

It may also be that those in a position to gift understand the legacy advantages but are unsure on the best order to gift assets to ensure they don’t fall foul of the regulations and incur IHT anyway. The distinction between whether an asset is better gifted during one’s ifetime, or left as an inheritance, can be a fine line for many.

18 March 2019

Another factor may be important when it comes to people being unwilling to pursue the most tax-efficient strategy for their estate planning: discretion. Previous Canada Life research in our Home Is Where The Wealth Is report5 found a surprisingly large proportion of retirees discussed financial plans only with their spouse. Over one in four didn’t discuss them with any family members at all. Traditional attitudes that inheritance is a matter for after death and not to be discussed during lifetime may feed into our findings that over 55s aren’t necessarily prioritising the most efficient inheritance outcomes.

Plenty may be being held back by misconceptions, either of what benefactors might think, or around how flexible their arrangements can be. But given the generational split between under 55s and over 55s – on how they view the pension freedoms tax changes, and how willing they are to take advantage of them – family conversations with younger generations more open to using alternative income sources in retirement could open up considerations around using pensions specifically for inheritance.

Have you discussed your plans to leave an inheritance or provide gifts with your beneficiaries?

Have you discussed the value of what you expect to inherit / be given with your benefactor?

Over 55s who plan to give or have given gifts that they would otherwise have left as

an inheritance

Under 55s who expect to receive an inheritance or

gift that would otherwise be inherited

One area of good news is that conversations are perhaps more open than some would have expected. But there may be a cultural mismatch in what is meant by discussion of inheritance between the generations.

• A majority (55%) of over 55s who have gifted or plan to gift say they have discussed inheritance with their beneficiaries

• More than four in five advisers (82%) say their clients are likely to discuss their inheritance with beneficiaries (44% very likely, 38% slightly likely)

• But only just over a third (34%) of under 55s who expect to receive an inheritance or gift have discussed the value of what they expect to receive with their benefactor

Nonetheless, the increased comfort of younger generations with measures such as using property wealth to generate income in retirement could help to shift the attitudes of over 55s. This is particularly likely given we also know from our Home Is Where The Wealth Is6 research that younger generations often view property inheritance in terms of the value they are receiving, rather than as somewhere to live.

Discussing inheritance with family

5/6 http://documents.canadalife.co.uk/home-is-where-the-wealth-is.pdf


7 https://www.directlinegroup.com/media/news/brand/2018/20112018.aspx

Advisers should seek, where possible, to encourage clients to involve family members and beneficiaries in the inheritance conversation. Where clients are more comfortable with open discussion around inheritance and retirement finance plans, some advisers may even wish to broach conversations around ‘pooling’ family assets and income, considering where there may be tax advantages in treating the family’s wealth holistically and planning accordingly.

Martin Bamford: “Family and money are two emotive subjects. It’s hard for a lot of people, particularly the baby boomer generation, who tend to have quite traditional values. Getting them to talk about money and dying is tough. A few years ago, we hosted a Death Café. It sounds horrendous, but it is a fantastic concept and it was actually packed full of laughs and people came away feeling really good about it because they had, probably for the first time in their lives, a really good, open conversation about death – their expectations, their wishes, all the rest of it.”

These conversations have wider benefits beyond tax planning: recent Direct Line research7 has found one-fifth of wills written divide assets unequally among beneficiaries, prompting concerns that unequal distribution could be behind an increase in the number of contested estates in recent years (something that can also be avoided through using trusts, and indeed it is harder to contest a trust than it is to contest a will). Openness around inheritance planning can help to correct misconceptions, resolve grievances, and set healthy expectations.

20 March 2019

Andrew Pennie: “As a starting point, if someone’s estate is above or close to the inheritance tax threshold, that is the point at which they would probably want to at least look into whether they would benefit from preserving their pension for inheritance.”

Much of this may chime with advisers’ own experiences. But the standout trend of this research – the stark difference in attitude between advised clients and the general public – may leave some IFAs wondering exactly what they should take from it, especially given the testament it pays to the efforts of the sector to adapt to the pension freedoms changes and promote their advantages. There are some clear disconnects in the public outlook that raise opportunities for advisers to demonstrate the value they can add. Many prospective clients could be planning for retirement based on misconceptions – for example, the belief of many over 55s that their property is the most tax-efficient asset they can leave as an inheritance even though they think it will incur IHT.

But beyond these more standard ‘mythbusting’ approaches, the overall impression of the research is of scepticism around the value the changes offer from much of the current generation retiring. As well as this, there is a sense many are perfectly happy to fit their inheritance around their life, rather than their life around their inheritance. There is a lack of awareness which is likely key to the lack of enthusiasm over 55s show for the changes compared with advised clients. Only a third of the cohort show much interest in changing their plans does not offer much promise for the moment. Knowledge of the reforms will take some time to percolate, but scepticism may still hold.

In addition to views on property wealth, difficulties around the availability of non-pension assets to draw on in lieu of pension income, or even knowing what the best ‘order of disinvestment’ is for drawing on them, are likely an obstacle. This is troubling: many may erode their legacies more than they need to as a result.

But if the views of younger generations are anything to go by (and the regulations remain unchanged), there is long-term promise that using pensions as a wealth trust could become a norm. When younger generations aware of the changes emphatically say they are interested in amending their financial plans in light of them, it likely also shows the importance of flexibility in allowing people to make the most of them. Those who are approaching or already in retirement will likely be some way into executing their financial plans, often predicated on using pension to generate an income. It may well be that those in this position are open to the benefits of taking advantage of the tax changes, but don’t necessarily see how they can do so from the track they feel set on.

So flexible solutions are key. Products that allow retirees to treat their assets more holistically, or to change strategy some way into their financial plans, are those which will offer the most latitude for retirees to take advantage of the changes.

For example, options such as equity release are growing in popularity, yet misconceptions still abound. It may well be the case in the coming years that some of those who now insist they would never consider using property wealth to generate income realise the advantages on offer if they ‘spend the property and save the pension’.

In these circumstances, products that allow for shifts towards investment, or which give those who would consider preserving their pension but don’t like the idea of not being free to draw on it should they need, are those which will be best suited to helping a generation still adjusting to these changes to make the most of them.

What is the upshot for advisers?


Recommendations

In light of our findings, we offer the following five recommendations to advisers on how you can help your clients and your firm:

• Highlight the public’s lack of awareness about the tax changes in marketing efforts: it’s clear from our research that while many of those already receiving advice are aware of the tax changes introduced by the pension freedoms and keen to take advantage of them, the same cannot be said for the general public. Highlighting the amount of tax people may be paying unnecessarily and the savings that are possible if they rethink the way they use their assets could be a strong driver for them to seek more information and advice. We have also produced a consumer-tailored version of this report you may find helpful in putting across to potential clients what the changes could offer them.

• Check clients’ assumptions about the tax efficiency of different assets: While not everybody will own a property valuable enough to incur IHT, our research suggests that many do not understand that passing on a pension, rather than a property, as inheritance could potentially result in a lower tax bill. So make sure that clients understand the details of the tax rules and that any assertions about how they want to manage their estate are based on up-to-date information.

• Encourage family conversations about estate planning: We know that young and old people have different perceptions of how they might use different assets to generate income in retirement. We also know that many people who plan to leave an inheritance, or expect to receive one, haven’t discussed it in detail with their beneficiaries, or benefactors. So they may be making long-term financial decisions based on incorrect assumptions of what their loved ones want or what will be available to them. To overcome these challenges, encourage clients to discuss their plans for managing their estate with their loved ones – or invite them to attend meetings together. While not all clients will want to do this, including multiple generations in the conversation could help those approaching retirement become more open to taking a holistic view and consider different ways to use their assets.

• Start conversations with younger clients: They’re worth having. Younger generations may have different ideas of what their income arrangements will be in retirement. Many of them already have different plans based on how they will take advantage of the changes. The freedom and flexibility that comes with being several decades away from retirement means that there are benefits in identifying future clients (perhaps among current clients’ beneficiaries) at an earlier stage, when they are much more open to unfamiliar options and can put in place long-term strategies that provide them – and you – with more leeway down the line when it comes to managing their retirement income.

• Open up considerations around trusts: The lack of willingness to gift among over 55s could well represent a fear of giving away their assets but having nothing they can draw on should they incur a major expense in retirement – such as needing to go into care. This is potentially holding back a lot of retirees from taking appropriate measures such as gifting and putting them at risk of passing on estates unnecessarily chipped away by IHT. More flexible options such as trusts, where access and control can be achieved, allow clients to manage their assets in a way that ensures their beneficiaries receive the most they can from what is passed on. But it also reassures those making the gift that they won’t be left out of pocket should their circumstances suddenly change.

22 March 2019

Methodology

This report is based on qualitative interviews conducted by Linstock and quantitative research conducted by Censuswide:

• Censuswide polling conducted online between 05/11/2018 and 09/11/2018, of 1,000 UK adults aged over 55, who own a property and have a pension

• Censuswide polling conducted online conducted between 05/11/2018 and 09/11/2018, of 1,406 UK adults aged between 16 and 54

• Censuswide polling conducted online conducted between 05/11/2018 and 13/11/2018, of 100 UK-based independent financial advisers


About Canada Life

Our vision is to help build better futures and be a world class financial services provider. Putting customers at the heart of everything we do and working in line with our values of people, excellence, integrity and together.

We help to build better futures. Visit www.canadalife.co.uk/adviser to find out more.

What you can expect from Canada Life

Great service, support and financial strength.

At Canada Life we believe in being here to support your customers through retirement, so we make it our mission to make the process of dealing with us as easy and as smooth as possible. To show our commitment to service excellence, we have introduced a Service Charter. We’re also proud of our heritage and our financial strength.

We’ve been around for a long time. In fact, we were founded in 1847 in Canada, making us the oldest Canadian life assurance company. Canada Life is part of Great-West Lifeco Inc., one of the largest Canadian life and health insurance companies. We have £807 billion of assets under management as at 31 December 2018.

Great-West Lifeco serves several million people worldwide, providing a wide range of retirement savings and income plans, as well as comprehensive protection contracts for individuals and families.

Contact usTo find out more about our range of products you can contact us on 0800 912 9945, or alternatively email us at [email protected].

Canada Life has been providing retirement solutions for our customers for a long time. We’ve actually been in the UK since 1903, looking after the retirement, investment and protection needs of customers.

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Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales no. 973271. Registered office: Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. MGM Advantage Life Limited, trading as Canada Life, is a subsidiary of The Canada Life Group (UK) Limited, and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales no. 8395855. Registered office: 6th Floor, 110 Cannon Street, London EC4N 6EU.

Telephone calls may be recorded for training and quality monitoring purposes. Stonehaven UK Limited, trading as Canada Life, is a subsidiary of The Canada Life Group (U.K.) Limited. Authorised and regulated by the Financial Conduct Authority. Registered in England and Wales. Registered number: 05487702. Registered office: 6th Floor, 110 Cannon Street, London, EC4N 6EU.

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