Now is the time to speak with clients about protection plans

How much is ‘enough’?

For engaged advisers, judging if a client’s cover is enough is based on having a thorough knowledge of the client, their family and their responsibilities, as well as an understanding of what delivery that ‘ideal’ will take, expressed as a capital sum, in order to meet their lifestyle.

Every client is different, so tailored advice is crucial to adding value. Furthermore, the adviser should know how much capital it will take to generate a particular level of income.

Currently, the expected yields from investments are set to be a little lower than they might have been only a few months ago.

If we expect a 2.5 per cent yield it will take £1.2m to generate £30,000 a year – and that is pre-tax. Now that will not factor in any overt provision for income to increase over time – though it might, of course, if yields increase.

It also must be said that this ‘model’ also rests on a desire to maintain (at least the nominal value of) the capital that generates the income, and, for some, that may be excessive.

This measure is subjective, and it will be down to the adviser to calculate what is ‘enough’ for their client, which may lead to a lower amount of capital being needed to generate the regular payment required.

Note ‘payment’, not income. The amount required may be generated at least in part by drawing down on capital – sequencing risk (reverse pound cost averaging) permitting.

A tax planning strategy may lend weight to this and it goes without saying that if you can deliver tax alpha, the amount you need to draw from your capital could well be less.

Having clarity over what the client’s aspirations are in relation to capital drawdown/preservation will also be hugely important.

The increasing use of cash flow planning tools has helped many clients visualise their situation, better assess the risks and appreciate the consequence of taking or not taking appropriate and relevant action.