CASE STUDY

Mike and Alan have been together for over 20 years. They own their own home and will pay off their remaining mortgage in the next 5 years. Alan is semi-retired, consulting on a freelance basis and Mike is working full time. They would like to get married in the future and are working towards both of them retiring by the time they’re 60.

THE NEED FOR PROTECTION

We’ll assume you’ve already put together a protection plan for Mike and Alan to take care of each other. Mike and Alan have been coming to you for advice about their pensions and investments but now Alan’s planning to leave some money to his and Mike’s godchildren. Alan has made some shrewd property investments over the years, so he’s got a substantial sum to gift. He’d like his godchildren to have the money now, so let’s look at how you can help Alan’s beneficiaries with potential inheritance tax liabilities should he die in the next 7 years.

Setting up a menu plan for a ‘gift inter vivos’ could help with the potential tax liability on his Potentially Exempt Transfer (PET). This is a way of matching the inheritance tax liability on any gifts that Alan makes in excess of his available nil rate band that HMRC could consider a Potentially Exempt Transfer, if he were to die in the 7 years after making the gift. Alan might also want to consider a 7 year level term policy because if the PET fails there will be no nil rate band available to his residual estate.

HOW CAN A MENU PLAN HELP?

This example shows the potential IHT liability on a gift, after deducting any available nil rate band and reliefs, of £600,000. Setting up a menu plan for a ‘gift inter vivos’ could help with that liability.

It’s possible to use a menu plan to cover the liability, by setting up separate policies with different terms. The initial sum assured should be the potential tax liability on the potentially exempt transfer (PET), so in this scenario it would be £240,000 in the first three years (i.e. 40% of £600,000). The total amount of cover would reduce over the years in line with taper relief. If Alan were to die in the first three years then all five policies totalling £240,000 would be paid. If he were to die in year five then three policies would remain to pay out a total of £144,000 and so on.

Conversation Tips

• Find out about your clients' financial aspirations so that you’re linking those end goals to protection – changing the ‘need’ for protection into ‘wanting’ protection.

• Talk about how your client would cover any investment gaps if they could no longer earn money to pay into their pension or investment pots.

• If your clients had to stop paying into an investment pot because they were too ill to work or died, would their families have to cash them in early? Would they face exit fees? A protection policy on an income basis could help them to continue making payments.

• Consider whether it is appropriate to put your client's policy in trust.

• Potentially HMRC could become the largest beneficiary of their estate!

• You can talk to your client about the impact of the pension lifetime allowance on any pension fund that they wish to leave to beneficiaries and the importance of keeping their pension death benefit nominations up to date.

• You can talk to your client about the impact of lifetime allowance on any money that they wish to leave to beneficiaries

• A menu plan would provide flexibility to amend or add in additional protection due to changing circumstances over and above IHT protection.

• Are your clients fully aware of their assets; house value, cars, boats, bank accounts, household contents, investments?