Protection News - March 2014


Goodbye annuities, hello protection

The Chancellor's decision to scrap the requirement to take an annuity and enable pensioners to decide how they fund their retirement is sure to be a vote winner. Few of us find the concept of handing over the bulk of our hard-earned pension savings in exchange for an annuity very attractive, especially when report after report shows they can represent poor value for money. But, while the proposed flexibility is a boon for many people approaching retirement, removing the requirement to take an annuity has plenty of unintended consequences. As well as the potential for pensioners to blow the lot in the first few years of retirement or, worse, fall foul of con artists targeting them with investment scams, there are also implications for inheritance tax (IHT) planning. IHT at 40% is paid on anything in an estate over the nil rate band, currently £325,000. A sudden injection of cash from a pension pot could potentially see even the most prudent of pensioners with an IHT planning problem. For example, take a couple living in a property worth £400,000 with savings and investments of £100,000. They don't have to worry about leaving their children an IHT bill until they take their pensions as cash, adding a further £500,000 to their estate. On this £1m estate this would equate to an IHT liability of £140,000 on second death. Some may argue that it is better to leave loved ones 60% of the pension pot than to hand it all over to an annuity company and see it die with them. But, with IHT regarded as a voluntary tax, it's a great opportunity for advisers. Investments into AIM portfolios and Enterprise Investment Schemes can be IHT-free after just two years. But, as these are investments into very small start-ups, there's considerable risk that someone could lose the lot. A more conservative - although some would say palatable - approach is to insure the future liability with a whole of life plan. These are a form of life assurance that, providing premiums are maintained, pays out a guaranteed amount on death. Written in trust, the cash is paid outside the estate and is available within a matter of days to settle any IHT bill. The pensions revolution may remove concerns about rip-off annuities but the proposed flexibility introduces a whole new set of financial planning requirements in retirement. Whole of life plans will be one way to help pensioners pass on their pensions.

Protection for tomorrow's first time buyers

With the budget introducing an extension of the Help to Buy scheme and an increase in the ISA allowance to encourage more tax-efficient savings, mortgage advisers are set to see an increase in the number of first time buyers over the next few years. But, while these savers rarely register on the advice radar until they've made an offer on a property, they have important protection needs that shouldn't be overlooked. The average first time buyer deposit was £30,943 in 2013 according to the Halifax but this pot of cash can soon disappear if they are unable to work due to illness or injury. Income protection and critical illness insurance can ensure someone doesn't have to empty out the deposit fund to survive. Although these savers probably won't want to divert any further funds from their savings, income protection and critical illness insurance are both relatively low cost at younger ages. Additionally, cover can be tailored to fit their budgets to ensure that, whatever happens, they can hang on to their savings as well as their dream of home ownership.

News in brief:

• Protection Review has partnered with the Association of Professional Financial Advisers (APFA) to provide independent specialist protection training for advisers. The half-day sessions, which are free to APFA members, cover all aspects of the UK protection market. • A newborn baby boy can expect to live to 78.7 years and a girl to 82.6 years according to the government's latest National Life Tables. This is an increase of 2.5 years per decade for boys and two years per decade for girls since 1980/82. • Engage Mutual has enhanced its over 50s life cover, adding an option to claim a cash lump sum on diagnosis of a serious or terminal illness. Policyholders can claim the full sum assured on diagnosis of a terminal illness and 20% of the sum assured if they have a serious illness. • Aegon UK has published its income protection claims statistics showing that the number of claims paid had increased by more than 10% 2013 - 93% up from 83%. • VSP Vision Care, the largest vision care company in the US, is expanding access to eyecare benefits in the UK and Ireland. • Ageas Protect has entered the relevant life assurance market. The new policy allows businesses to provide life assurance for its employees outside of a group scheme but still benefit from tax relief. • Fraud is costing the NHS up to £5bn a year according to a report by Jim Gee, the former head of the NHS's anti-fraud section. This would pay for nearly 250,000 new nurses. • Employers will get tax relief worth up to £500 per employee on health-related interventions that help tackle sickness absence. This is expected to be introduced in October alongside the Health and Work Service.

This article first appeared in Mortgage Introducer