End of tax year protection considerations
Author:
Andy Roberts, Technical Sales Manager
Thursday 14 March 2019
As the end of the tax year approaches, many financial advisers attentions will understandably be drawn to maximising available contributions and tax reliefs within clients’ investment portfolios. But don’t forget the valuable part protection has to play.
Wealth Protection is often about effecting life cover in tandem with an investment. For example, in my former days as a BDM, when I met a wealth adviser for the first time I would ask if they use life insurance to cover clients’ IHT liabilities. Some would say they prefer to invest the liability away using Business Relief (BR) qualifying investments instead.
Fair enough, I would say, but what about the 2-year period of inheritance tax (IHT) liability on such schemes - do you at least protect that with life insurance? As often as not the answer would be no. It shouldn’t be a case of instead of life cover, but as well as life cover.
Here are some of the Wealth Protection solutions available with AIG Life.
Investment IHT Cover
Some providers of BR qualifying investments offer non-underwritten ‘integrated’ life cover, which is paid for via an increased Annual Management Charge. This can be a good option for clients who are in poor health and wouldn’t otherwise be able to get cover, but of course comes at a significant cost.
AIG launched an alternative proposition last year for clients who are able to obtain underwritten cover. This may be considerably cheaper than the integrated options, has a higher maximum level of cover, and in some cases a higher maximum age at entry too. It is also available on a joint-life second death basis.
Here are some indicative costs of our ‘Investment IHT Cover’:
|
Investment |
£100,000 |
£200,000 |
£500,000 |
£1,000,000 |
| Life Cover | £40,000 | £80,000 | £200,000 | £400,000 | |
70 |
Annual Premium | £348.20 | £725.01 | £1,632.73 | £3,142.24 |
| % of Investment | 0.38% | 0.36% | 0.33% | 0.31% | |
80 |
Annual Premium | £1,174.44 | £2,294.35 | £4,616.59 | £10,604.55 |
| % of Investment | 1.17% | 1.15% | 0.92% | 1.06% |
Correct at 21/09/18. Life cover 40% of investment. Assumes non-smoker, accepted at standard rates. Annual premiums (guaranteed, level).
The same proposition can be used when a slightly longer term than two years is required - for example with Enterprise Investment Schemes, when it can take several months for the investor to receive the shares and therefore for the two-year clock to start ticking.
Under MiFID II rules, advisers must compare and present alternative solutions before recommending a bundled option such as integrated cover, so if you advise your clients on these types of investment schemes, please take a look at our sales aid.
Legacy Gift Planning
If there was a vehicle which offers a guaranteed risk-free return, is tax-free (including of IHT), can be inflation-proofed and can provide a higher rate of return than feasible from a traditional investment, would your clients be interested?
That’s exactly what a Whole of Life (WOL) policy can provide. A WOL policy has no cash-in value, so is not suitable for clients who may need access to the funds during their lifetime, but for those who want a tax-efficient way to pass funds onto their family, it can be a very attractive option.
For example, compare the returns for a 65 year old contributing £5,000 per year to a WOL policy - which secures a guaranteed sum assured of £224,615 - and an investment generating 5% annual compound growth, until he dies age 83*:
Comparison |
Whole of Life |
Investment |
| Total Contributions at Death | £90,000 | £90,000 |
| Value Returned | £224,615 | £140,660** |
| Net Gain/Loss | £134,615 | £50,660 |
| Return (Gain/Loss ÷ Contributions X 100) | 149.57% | 56.29% |
The return on a WOL policy of course depends on at what age the client dies - you can use our Legacy Gift Calculator to compare the rates of return based on different variables - such as assumed age of death and growth on the investment.
One particular way WOL can be used as an effective method of passing on wealth is via an ‘Enhanced Gift Trust’. This combines a Discounted Gift Trust with a WOL policy to enhance the return than likely from the underlying investment bond.
Portfolio Protection
For pre-retirement clients the aim is to build their portfolio to reach a target level before retirement, and when it comes to the end of the tax year the focus will usually be on maximising ISA and pension contributions. But it also provides an opportunity to review their portfolio protection.
When projecting the future value of a retirement fund you’ll have assumed a certain level of contributions, so what would happen if a breadwinner was to die, suffer a critical illness or be unable to work for a long period of time? Could they (or their surviving spouse) still make the required level of contributions for the portfolio to reach its target?
AIG Life can protect your clients against not only a shortfall in the portfolio due to death or critical illness, but also their regular contributions with our unique ‘Total Disability’ (TD) option.
TD - not to be confused with TPD - draws down the critical illness sum assured by 1% per month if the client is too ill to work, and this regular monthly income could potentially help them maintain their contributions as well as pay their bills.
You can read more about how TD works in our new sales aid, and why it’s relevant to today’s market in a recent article written by our Intermediary Director, Vicky Churcher, here.
*Premiums for a male non-smoker aged 65 were correct as at May 2018
**Assuming annual compound growth of 5%