Will Hale, CEO of Key Equity Release says later life lending is rapidly moving from niche to norm and although products such as lifetime mortgages won’t be appropriate for every client it is imperative that advice brings every part of their balance sheet into view.
The clock is ticking on the inclusion of unused defined contribution (DC) pensions in estates for IHT purposes which takes effect from April 6th next year.
Advisers are already adapting to tax changes impacting estate planning with the introduction from April this year of 100% IHT relief only up to £2.5 million per individual on qualifying agricultural property relief and business property relief assets.
Above that threshold IHT relief is cut to 50% resulting in potential IHT charges.
This is all happening against a backdrop of soaring IHT receipts driven by a long-running freeze on IHT thresholds.
The nil rate band has been held at its April 2009 level of £325,000 for 17 years now and will stay at that rate until April 2030 at least along with the £175,000 resident nil rate band which has not moved since April 2020.
The agricultural property relief changes have proved controversial but the inclusion of unused DC pension funds in estates will impact far more people.
According to Government forecasts* it will generate an additional £5.46 billion in Inheritance Tax (IHT) receipts by 2030/31.
In its first year of operation alone the measure is estimated to mean around 10,500 estates having an IHT liability which they would not previously have had and a further 38,500 paying more IHT as a result.
Those figures are concentrating minds across the financial planning community about the need for a wider range of solutions than simply maximising pensions and ISAs.
The old rules no longer apply and decisions about which assets to use for retirement and estate planning and when, across both accumulation and decumulation phases, are becoming more complex.
One simple answer – which needs more explanation – is that increasingly the home and property wealth belongs at the heart of any strategy.
To date, advisers and clients have not been making the full use later life lending options as part of estate planning and IHT mitigation.
Putting the home in the plan
Estate planning advice is far from straightforward and advisers recognise the need to be fully equipped with the insight, tools and support to serve clients who are now looking more holistically at their accumulated wealth drawdown options in order to achieve good tax-effective outcomes.
Best practice drawdown and intergenerational planning strategies need to be rethought in the wake of the inclusion of unused DC pensions in estates.
The approach now has to move to an all asset basis which for many clients must include the family home.
For many customers it’s the largest asset in the personal balance sheet, and it should be treated as such and not ruled out of consideration for funding retirement income and as part of efficient intergenerational wealth transfer strategies especially where liquidity is limited.
For some, releasing funds from their pension and other savings will enable them to plan for themselves and their family but for others this liquidity will not be enough for them to achieve their personal and intergenerational planning objectives.
Many will want to help family with house purchase deposits and provide wider financial assistance but this approach to gifting also needs to be considered as part of retirement income planning and ensuring enough financial resilience to navigate the different challenges that later life can bring.
It is impossible for advisers to have truly holistic planning conversations without acknowledging the scale of housing wealth – recent research from Savills** points to over 60s owning more than £3.84 trillion of housing equity.
Bringing the home into retirement and estate planning should be the default for all clients.
Later life lending solutions, including modern lifetime mortgages, will not be right for all customers but for many they may be, provided they are accompanied by informed advice, clear adviser explanation and confirmed client understanding.
Where later life lending fits in adviser businesses
Later life lending can help achieve financial planning outcomes in the short-term but will also involve costs and these need to be considered in the context of the potential to reduce overall inheritance tax burdens.
Advisers need to ensure that a clear set of alternatives such as using cash, selling investment portfolios, pension withdrawals, downsizing and family loans are considered.
The costs and trade-offs of using lifetime mortgages need to be explained.
And of course advisers either need to be fully qualified to advise on equity release or have an established referral relationship with a specialist in place.
How products have evolved
Lifetime mortgages can help with enhancing retirement incomes and with supporting gifts to family members.
Modern lifetime mortgage products now offer a wide range of benefits including the ability to make voluntary repayments as well as rate discounts for customers committing to serve some or all of the interest.
Products allow customers the flexibility to mitigate the impact of compound interest and to manage the cost of borrowing while maintaining their standard of living as tax bills rise.
There are options available which offer no early repayment charges, increasing flexibility in the event that circumstances change, perhaps on the back of an inheritance, or opening-up the possibility of remortgage opportunities if rates fall.
Benefits and protections of later life lending also include fixed rates for life, certainty of tenure and no negative equity guarantees.
Later life lending is rapidly moving from niche to norm and although products such as lifetime mortgages won’t be appropriate for every client it is imperative that advice brings every part of their balance sheet into view.
Therefore, the home needs to be included in all planning decisions and IHT mitigation strategies.
Sources:
Main image: estate planning, tierra-mallorca-NpTbVOkkom8-unsplash
