With financial planning becoming ever more complex, there’s a need for some holistic thinking, viewing wealth in-the-round, and bringing in new but established planning resources, argues Will Hale, CEO, Key Advice.
The implications of last year’s Autumn Budget have largely been digested by advice firms who have been presented with some complex planning challenges for 2025 and beyond.
The major impact on IHT planning of inclusion of pension funds in estates; changes to Agricultural and Business Relief and an extended freeze in tax thresholds all create financial planning challenges. Throw in the rise in CGT and it’s a certainty that planning
has become harder.
The increased difficulty in planning for IHT and retirement underlines the need for a fundamental reassessment of the role of property wealth in financial planning strategies both in the accumulation and decumulation phases.
Many older clients own considerable capital tied up in property which should be getting put to work – helping maintain standards of living in retirement and so addressing problems with deficiencies in pension savings and/or being used to transfer wealth to the younger generations to help more people onto the property ladder or young families make that step up the ladder.
Later life lending offers a compelling option for customers to manage their mortgage debt more efficiently throughout retirement while also putting more money into the economy so driving societal benefits and supporting the government’s objectives around growth.
Paying mortgages in retirement
The traditional view that mortgages should be paid off before retirement is clearly no longer viable for a significant proportion of the population. Many people struggle with saving into a pension while buying a house and paying a mortgage. Inevitably many
in later life have limited retirement savings and significant mortgage debt.
The idea that mortgages have to be paid off before retirement needs to be re-evaluated. Home ownership remains a sensible decision and it is positive that the mortgage industry has stepped-up to continue to facilitate this for many even in a period of rising
house prices and other cost of living challenges. However, mortgage debt needs to be managed differently – with interest only options considered in the early years when pressures on finances are likely to be at their greatest and/or extended terms to allow
more people to meet affordability hurdles.
With the product innovation taking place in the later lending sector, having mortgage debt in retirement is not a bad position to be in. The industry and regulators should recognise this and embrace the changing nature of customer needs.
Changing IHT planning
The inclusion of pensions in estates should prompt wealth advisers to consider retirement wealth in-the-round and look at the wider range of strategies for inheritance planning as well as wealth accumulation and wealth drawdown with an enhanced role for property
and equity release more specifically.
Adopting a wider holistic approach to retirement planning will benefit clients while further supporting the drive to deliver good customer outcomes under the Consumer Duty regulations. Clients should be advised of all their options under Consumer Duty and not considering property wealth runs counter to that.
Whilst regulatory silos can make the advice process more complex, it is not necessary for all advisers to expand the scope of service that they offer. Having referral relationships in place with trusted specialists can be a good way to ensure customers can access the products most suitable for their circumstances. The challenge is for advisers and paraplanners to build their knowledge/awareness of the options available in sectors adjacent to their own area of expertise and then to have a triage process in place to identify opportunities to make referrals.
The changed later life lending market
Providers have transformed their products to meet customer needs. Lifetime mortgage lenders have tackled the need for innovative new products by offering higher LTVs, shorter fixed early redemption charges and increased flexibility around regular payment options.
Modern lifetime mortgages are a suitable option for a significant percentage of over 55s customers enabling them to actively manage their borrowing as their circumstances change through later life.
Innovations have also not been limited to the equity release space. Products across retirement interest only mortgages, term interest only mortgages, long-term fixed rate products and mainstream mortgages specifically aimed at older borrowers have evolved and
now offer great options for customers with affordability.
The challenge remains ensuring all advisers are aware of these options and are looking to all sources of wealth to help fund retirement which includes property as much as pensions and other investments.
Advice is becoming more complex and getting to the right outcome for customers will require advice firms to think holistically, to look outside of their own silo and to work with other specialists where appropriate. The aim should be to create an ecosystem that
supports property, pension capital and other assets all being part of the financial planning process.
Creating a more holistic financial planning landscape is a significant endeavour and whilst changes to the regulatory rule book are ultimately probably the route to a more joined-up market there are practical steps that the industry can take now. These would include embedding consideration of property wealth in guidance services such as Pension Wise and workplace propositions and ensuring appropriate referral routes into later life lending specialist advisers.
Setting up a referral arrangement can help ensure firms fulfil their obligations under Consumer Duty whilst also improving their service proposition and creating a new income stream.
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