Retirement Income  

How 2020 brought later life planning into sharp focus

  • Explain the challenges of the pandemic for later planning advisers
  • Explain impact of potential tax changes
  • Explain the crucial elements of later life planning
How 2020 brought later life planning into sharp focus

As we begin a new year, we should reflect on the short-term impact the pandemic has had on investors and what we can learn to take forward.  

For advisers and wealth managers that are planning for their clients’ retirements and later lives, there are some new, and some not so new, challenges to face up to.

Later life planning has become more topical than ever and advisers and wealth managers need to absorb the seismic changes we have just witnessed if they are to be in a position to modify their propositions and meet their clients’ needs in the new world. 

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The search for income

Maintaining a reasonable level of income in retirement has been the key to allowing people to pay for life’s needs for generations.

While this is not a new challenge, securing a reasonable level of income in the current environment, without taking on unpalatable levels of risk, requires renewed thinking.

The combination of economic pressures brought about by Covid-19, Brexit uncertainty and ongoing geopolitical insecurities has made the search for income from traditional assets harder and harder.

Annuity rates, interest rates and fixed income yields are all at notable lows and dividends from listed shares are disappointing on a historic basis.

While taking some growth from an equity portfolio could offer better returns, the level of volatility and the risk of drawdowns associated with these investments makes many investors understandably nervous.

In addition, these investments are all listed and therefore exposed to market uncertainty and investor sentiment, which has been swinging wildly over the last few years.

Increasingly, wealth managers are turning to areas that avoid this but offer the opportunity for significantly improved growth or income prospects, such as unlisted or private investments.

The threat of tax rises

With government borrowing already sharply up and the potential for long-term lingering economic effects from Covid-19, speculation about tax rises is mounting.

The Treasury has a whole armoury of potential policy responses available to it, monetary as well as fiscal, so tax rises are definitely not certain, but they are possible.

If we assume for a moment that some areas of taxation will harden, then the question to ask is where? And of course, two areas of legislation that always come up for discussion that are directly relevant to later life and estate planning are Inheritance Tax (IHT) and Business Relief (BR). 

The Treasury normally follows a process before considering tax changes, firstly reviewing the policy, its costs and effectiveness, before then making any specific recommendations.

Conveniently, the Treasury commissioned the National Audit Office (NAO) to look at the impact of general tax relief policy and published their findings in February this year1. The report categorises the c.1,200 current tax reliefs available.