Simon Harryman, senior business development director at Ingenious Group, outlines some considerations for financial planners based on economic forecasts
Life was good in 1967 Britain; the first colour television broadcast was made on BBC2, Sandie Shaw won the Eurovision Song Contest and Beatlemania was in full flow. August 1967 was particularly sunny and warm and annual price inflation (RPI) sat at just 1.4%.
Within 12 months, RPI reached 5.7%, subsequently remaining above 5% for THIRTEEN years, including five years above 10%, and peaking at an eyewatering 26.9% in August 1975. From 1967 to 1983, inflation averaged 11.1% per annum, and the price of goods increased by 540%, having a devastating impact on the standard of living.
Those who were starting out in life in 1967, looking to buy a home and raise young families, are now in their 70s and 80s with very different aspirations and concerns. But if inflation makes a comeback, as is expected, what does this mean for them now that they are retired and for their later life and estate planning considerations?
Most people in later life have two overriding objectives: leave the best possible legacy for their family and ensure they have enough money to meet their own life needs. The two are not mutually exclusive as their accumulated wealth may need to be used for either purpose depending on how life pans out. Advisers therefore need to help them plan for all possible eventualities.
Inflation and capital taxes
Let’s consider the impact of inflation on legacy aspirations. In March 2021, the Chancellor froze all inheritance tax (IHT) thresholds until 2025/6. In an inflationary environment where asset prices, particularly property values are increasing, more estates will be dragged into IHT. Those who are not actively looking to sell their properties may be blissfully unaware that their assets have crept above the nil rate band and the prospect of IHT being levied on their estates may come as a surprise to them. For those with assets above £2m, again likely to be a growing number, residential nil rate band taper will accelerate as the value of their estate grows and so they may not enjoy the same level of relief they had been expecting. Gifting of IHT exempt assets, such as business relief (BR)-qualifying assets may be considered as a way of mitigating this.
Similarly, more clients could be dragged into the capital gains tax (CGT) net if they wish to crystalise gains made on other assets. Keeping track of rising asset values relative to tax exemptions and thresholds could make a real difference to the legacies clients are able to leave to their beneficiaries, or to the amount of money available for clients to pay for their own life needs. Proactive management will become an increasingly important aspect of the adviser role in an inflationary environment.
The ‘real’ value of money
Many clients looking to maximise their legacies while maintaining access and control consider BR-qualifying investments, of which there are now a variety on offer from a number of investment managers. Many of these have a ‘capital preservation’ focus and target modest returns, some as low as 1.5% p.a. and numerous around 3% p.a. Inflation has been low since the market for these products was developed, allowing investors to maintain the real value of their investments, but with little room to manoeuvre for any bumps in the road. In recent times some services have struggled to meet these targets due to volatility in energy related assets.
While the Office for Budget Responsibility (OBR) medium-term forecasts for RPI are around 3%, Deutsche Bank has warned of a global inflation time bomb, with inflation re-emerging in 2023 at a level which “could resemble the 1970s experience”. It has to be said that this is not a widely held position but not many people expected to see double-digit inflation figures when they were enjoying the summer of 1967!
Even if the OBR is correct, some BR-qualifying portfolios would be struggling to preserve capital in real terms. It is vital therefore that advisers look towards services which can offer greater returns, and low costs, so that legacy aspirations can remain intact.
Rising costs of raw materials and energy lead to higher prices for consumers and a poorer standard of living if incomes cannot keep pace with expenditures. This is at its most acute for those in retirement, who often rely on savings to supplement their income, and where pensions may be index-linked but ‘real inflation’ is growing at a faster rate than the index. In this situation, a planned legacy may now need to be repurposed to meet life’s needs.
Accessibility & liquidity
Strong performance and minimising tax deductions on withdrawals can make money go further, but accessibility is a prerequisite in this scenario. While BR portfolios are favoured by many as they are, in principle, more accessible than most trust-based estate planning strategies, liquidity within the underlying companies and investments varies significantly. In challenging times, physical assets can prove difficult to sell in a timely manner and at a favourable price, even those shares listed on AIM may not be as readily realisable as they appear. Holding cash for liquidity purposes would become too much of a drag on returns in an inflationary period. This could explain why there is a trend developing towards secured lending-based investments where no trade or asset sale is required as there is natural liquidity within lending books.
Care provision
We all know that more and more people will need care of some description in later life. We know that it is expensive and can wipe out a lifetime of saving in next to no time. Care provision is, by definition, a very personal service, delivered by caring individuals, who have bills to pay and who will face rising costs themselves. Ignoring for one moment any cost of goods, the inflationary surge in labour costs in the care sector alone will lead to significant increases in care fees. Obtaining professional guidance to navigate the care system, securing great care at the best possible cost will become increasingly important for families who want the best for their loved ones.
The value of advice
Only 5% of the UK population is over the age of 75 and will remember what it was like having to deal with inflation back in the 1970s, while most financial advisers were still at school and many not even born. The experience of the client coupled with the expertise of the adviser makes for a good partnership but meeting the challenge of inflation requires product providers to support them with solutions which can provide sufficient growth, income, accessibility, tax efficiency and access to professional services in specialist areas such as care.