The Real Cost of Getting Your Retirement Plan Wrong

Transcript

speaker-0 (00:00.024)
People are coming back into the market for annuities and actually realizing that you can actually provide for your spouse, you can actually guarantee them for a number of years. Rather than actually buying an annuity with your two hundred thousand pound pension pot and you die tomorrow and it disappears, you can put guarantees around it for ten, twenty, thirty years, which means that you'll definitely know whatever happens, you're getting value for money to a certain extent that it's gonna keep paying out regardless of what happens to you or your spouse.

speaker-1 (00:27.246)
Hello and welcome to this episode of Wealth Talk, the podcast purposefully designed to help you build, protect and transfer your wealth. And I'm joined today by, well, know, someone's got a poison chalice today, I think. He's an IFA. Notice he's got the memo about the check shirt today. hope you're watching on video. It's my good friend and a trusted advisor and is probably one of the only IFAs.

that genuinely I think I trust enough to invite them onto a podcast. In fact, Andy, I think you're the first IFA I've ever invited onto my podcast. You know how much I sort of get on my soapbox and talk about fees and about double standards. And we saw today actually, Rathbones have been clipped by the FCA for their double dipping. SJP have been clipped for some

shared your practices. So lots of things happening in the industry, which always undermines my confidence. But you know, you're one of the rare IFAs who actually share wealth, value. So welcome, Andy Cooper. What do you want to say about yourself, Andrew?

speaker-0 (01:43.118)
Well, thanks for that introduction. That's I feel really privileged, Kevin, to be invited. the first ever. That's that's a milestone. Thanks for inviting me onto the podcast. Maybe I I'll start with I've I've been around for a little while, that's part of 35, 40 years. What's brought me into this this part of the industry in terms of financial advice is really I suppose looking at myself and how I would want to be treated as a client is really

a a lot lot of the reason why I actually joined Kingsford Law in the first place and actually joined the financial services industry. So I think the idea that clients need a lot of help these days, particularly with some of the things we're going to talk about today, the front of my mind is let's look after people. Let's make sure that they have a good outcome, you know, both now and in the future. And that involves future proofing. If that involves taking a look at their assets, their pensions, etc., and making sure that they've got

Got the best deal, got a good deal, not getting a raw deal. That's what we're about.

speaker-1 (02:39.712)
I appreciate your introduction and everybody who's an IFA would say that anyway, wouldn't they? But given all the reputational bad stuff and given the real value of what AI is bringing to the potential cost of managing money, mean, surely nobody really needs an IFA anymore. They could just Google it or AI themselves. What value are you really bringing?

speaker-0 (03:05.89)
Well, I suppose with with AI and I've I've dabbled in that a little bit myself in terms of Googling and the answer always comes up at the start with AI. It's not always true. The answer is not always there and it's not always correct. It's quite a a broad set of needs that that clients have with lots of intertwining products and services that they can get hold of to actually help clients work their way through that to understand what's under the bonnet within their investments, within their

pensions and anything else we're we're going to be talking about, I think is is essential still because some of these situations, some of these products, some of these services are actually quite complicated. They're quite complex. Some of them are very simple. You know, you can if if somebody wants to invest into an ICE, they can probably pick up a an online ICE provider very simply. And there you go, there you go. There's my 20,000 pounds. Nice and easy. So these sorts of things are probably very straightforward. But when it comes to the complications of a retirement plan, for example,

adding to that the new issues we have around inheritance tests with the rules we're going to talk about in a minute coming in next year in April twenty seven. I think that there's a lot of technical stuff out there which which I think I can help with. Clients I think need me to help them through that. That's where I think I can add the add the value.

speaker-1 (04:20.384)
Yeah, joking aside, you know, I think there are some tasks, some things that can be done relatively simply. You mentioned one of those, the simplicity of ICES and simplicity of cash management, for example. But where I think a good IFA really does make a difference is in understanding where complexity brings choices that are difficult to see through unless

they understand your exact circumstances. And I think no better one probably than the retirement options with tax-free cash, with income, with annuities, with a whole bunch of different choices and options that reflect the fact that different people are retiring at different dates, state pension kicking in later and later and later. So give me a sense of some of the...

kind of complexity then where somebody who is getting close to that retirement age, maybe in their late 50s or even early 60s, and they're saying, right, I need to create a sustainable retirement plan. Surely I can do this on my own. What would be the flavor of some of the considerations that they may not think through themselves if they were just Googling it or asking AI?

speaker-0 (05:47.52)
I think that there are probably a many clients out there who have many straight very straightforward situations where they come to a retirement, they've got one pension, maybe, and it's that's the pension they're going to be drawing on, whether that's a defined benefit or defined contribution scheme. But a lot of clients that we speak to have more complex situations. They might have a property portfolio, they may have different types of investments, including investment bonds or or or ISES or normal investment accounts, plus pensions, of course. So

How you draw income from all of these sources, knowing what's coming next, you know, we know that there's going to be a state pension. Hopefully, that continues. And hopefully it doesn't, the the the goalposts don't move even further away from us. But at 67, most of us will have a state pension coming at 67. So we know that's coming around the corner. So we know that income's gonna be starting at some point. So with all these other assets that people have for pensions, where you have tax-free cash and you have taxable income with

Normal investment accounts where anything you do with an investment account is taxable, potentially you're going to get an income on growth. It's potentially taxable, whereas ISAs aren't. Any income we draw from an ICE is not taxable. So there's a mishmash of assets that people have. And to optimize your tax efficiency is probably the primary goal for most clients that I speak to. With that in mind, then you bring in the prospect of working through the growing mess of

Inheritance tax or the growing involvement and complexity of inheritance tax, particularly next year with pensions coming into the the equation. It's more important than ever, I think, for people to think about how how what I do today to generate their recurring income, is that going to damage me later? Is that gonna cause problems later when I want to make some gifts, set up a trust, whatever it may be? And today we're I think future proofing what you're doing today or is is probably as important as ever, really, in terms of how you draw income from all the all of these assets.

speaker-1 (07:40.226)
Let's stick to the retirement piece because the inheritance tax is another one because essentially one might argue historically there were always kind of two mindsets for anybody who were taking responsibility for their pension. So let's be clear, the divine benefit pensions will get affected by inheritance tax and they're few and further between. State pension is a guaranteed income provided you've made your appropriate NI contributions.

Is it going to be around at 67? Probably not. It'll be moved to 68, then 69 and 70. As we get towards an aging population, that's increasingly harder. We've already seen some calls from some quarters to abandon the triple lock. It just costs too much to provide a universal benefit, meaning a pension irrespective of whether you earn 10 grand a year, 100 grand a year.

or you're a gazillionaire like Elon Musk, albeit he doesn't live in the UK, so wouldn't qualify. I suppose the question I've got is some of the complexity historically was about being able to, when you took responsibility for pensions on that big change, the risk got transferred to the individual. So that risk means having to consider the implication of that risk. And when you've got money in a pension pot that can go up and go down,

stay the same is always going to have an option. How do you create certainty of income when the asset that provides the income is fundamentally of itself on turn?

speaker-0 (09:19.426)
The landscape here in this area has changed quite a lot over the last twenty years, I would say, with the pension freedoms we had, which came in what twenty years ago now, where it became very, very attractive to be putting a lot of your money into pensions. They're gonna be outside your estate for inheritance tax, and it's it's a great way to to shelter assets over time, ready for retirement and and for the future for your your family. But

What's happened over the last twenty years since the financial crisis, where interest rates have basically been very flat over two thousand and eight to two thousand and twenty two? Annuities have been not very interesting. Well

speaker-1 (09:58.734)
New tears Andy for people who don't know.

speaker-0 (10:00.94)
Yeah, an annuity is is a contract between the Innuitant, which is me and you, who are somebody retiring, who uses some of their pension fund, normally the taxable part of the pension fund after they've drawn the tax-free cash. That then buys an income stream for life for the innuitant and potentially for if they're if they've got a sp a partner for their spouse, for example, as well. And the idea of that is you are now now not exposed to the ups and downs of stock markets. you're exposed to the insurance company.

in terms of their risk, but that's all covered by the FSES in terms of the the protections. So you're taking the doubt, the risk off the table to a certain well, to a full extent, if it's all of your pension you're using. but what we're finding also is that people are are coming back into the the market for annuities and actually realizing that you can actually provide for your spouse still, you can actually guarantee them for a number of years. So that rather than actually buying an annuity with your

200,000 pound pension pot and you die tomorrow and it disappears, you can put guarantees around it for 10, 20, 30 years, which means that you'll definitely know whatever happens, you're getting value for money to a certain extent that it's going to keep paying out, regardless of what happens to you or your, your, your spouse. And also what I'm finding is that not everybody wants to go the full route with an annuity. They like a bit of flexibility. So to combine a an annuity with a with a drawdown strategy can allow

people the flexibility of drawdown still with the certainty of of an annuity. Well let's

speaker-1 (11:32.366)
Let's come back to that hybrid. And I suppose in the same way as cars have evolved from petrol, diesel to electric to hybrid and driverless cars now coming, you we're seeing all of these evolutions. I don't want to get caught up. It's very easy. Us Czech shirt brigaders who speak financial language can easily get caught up in that technical language. And I don't want that to happen here. Otherwise, people will switch off or they'll fast forward, right? So want to make this meaningful.

So I think what you're saying is people who are retiring will have an expectation of a state pension. So they know that's coming. They will often need a bridge to that. And if they've got a big enough pot as a family, they could part by an annuity. So in other words, give up some of the capital to give some bedrock to the certainty.

because the certainty of the state pension is coming and then the degree to which they want to have flexibility and control, they can do that as well. So can we just get that, is that what you're saying?

speaker-0 (12:44.302)
That's exactly it. Yep. You've explained that very well. Absolutely.

speaker-1 (12:47.662)
So I think therefore people looking at annuities might not get the fact that you can create this hybrid. And I think the other thing is interest rates are rising a bit now. So in, I think when we perhaps, you know, after the credit crunch and the gradual decline of interest rates up to COVID and then interest rates at half percent, 1%.

you're going to get annuities or the rate at which you give to get money back, the income exchange for a lump sum would be smaller and smaller and smaller. And for many people, the annuity market just simply died. It just wasn't worth giving up your capital. And there was no threat then in 2020 of a loss of an heritage tax benefit. So there was no reason to buy an annuity. But with annuity rates depending where you can get an increased annuity rate,

because interest rates are higher, or if you're unwell or have been through some health issues, which sometimes older people will get, and hair loss is one of those, Andrew, you don't get it. It increases the nudity for that. However, joking aside again, we often, when we talked about it recently when we had a chat, we, that when people are used to buying insurance, say,

They generally want to show themselves to be as healthy as possible. But when they come to potentially buying an annuity, you want to show yourself to be as unhealthy. I don't mean telling a lie. just mean, you know, just be honest, but be, you know, so that the underwriter, the annuity provider can actually provide a level of income that's commensurate with your real risk. And in some cases, what they're known as enhanced annuities, aren't they?

or impaired annuities where your life expectancy, but you can still build in a level of income for a spouse. And I think historically we saw people buying pensions, buying annuities on their own and not really discussing with their spouse. And then in your example, you die the following day, the pension could die with you, albeit we know there's always some guarantee, normally five years.

speaker-1 (15:10.658)
But are you saying that if somebody who's 60, who might want to buy an annuity now, can actually provide an income stream even as long as 90 for themselves and spouse?

speaker-0 (15:24.834)
Yeah, absolutely. And and obviously it depends on the individual circumstances whether that's the right thing to do. Whoever buys that annuity, the annuity, the person with the pension who decides to buy the annuity, it pays them for life regardless.

speaker-1 (15:36.814)
How many times has anybody come to you to say, I'd like to explore annuities with a guaranteed annuity for my wife of 25 or 30 years?

speaker-0 (15:45.74)
Nobody, at all. Not at all. And I don't people are unaware of what is out there, generally speaking. No, no fault of their own. It's just that's the way it is. It's the f the first and only time you'll ever come across this is when you start to think about retirement. So that's the moment in time where it it suddenly becomes large as life. And I I've had a few conversations with with clients of ours who initially don't want to look at annuities and then very quickly we're now onto it because you can use it as a very good strategy within your overall retirement plan, whether that's

purely annuities to pay pay you an income for life or as a part of a hybrid strategy, might be explained just now.

speaker-1 (16:21.08)
So the point that I made earlier on is there are some times in your life when it's absolutely imperative to have a good, let's say broker for the sake of an argument, who knows the marketplace on your side, who can help you understand what your real choices are. Because choices without clarity can lead to big mistakes. what would happen if you...

Did a bit of Googling, you bought an annuity for five years for your spouse. You hear from, you listen to this podcast later and go, no, I didn't realize I could have bought a 25 year one. What can you do about that annuity once you bought it?

speaker-0 (17:05.44)
Nothing at all, unfortunately. They're irreversible once you set them up, which is why it's such a big thing. It's such a big moment in time, that decision. You know, when you've got a drawdown, you've got more flexibility. But when you then buy that annuity, whether it's straight away or later on, you you're stuck with what you've got at that point. And it doesn't cost a lot, just a little point on cost here for these guarantees, for example, or having a joint life versus a single life, it doesn't cost a lot in terms of the amount of income you'd forego.

as opposed to having just a single life annuity. So if you're if you're married, you can have a single life annuity. Then you can have a a joint life annuity to look after your your spouse and you can have a guarantee. So these are the features you can add on to it. You don't lose a lot of income by doing that to protect both yourself and your your spouse and your family going forwards.

speaker-1 (17:53.102)
So when something is fundamentally massive as a decision making, you mentioned irreversible, which is an interesting word, isn't it? Never ever change it. So there are some big issues in life where there's an irreversible issue, let's say, where you would want to be sure you're getting good guidance and that guidance would be more valuable than getting it wrong.

speaker-0 (18:20.814)
Absolutely, because it is a one off decision, it's done. You you own that then. And and also the other thing we do look at being independent as advisors, we look at every provider, you know, we look at look at all the different levels of annuity. There can be a very big difference between one insurance company and another who provides annuities. So that makes a big difference too, potentially. Yeah.

speaker-1 (18:39.542)
I guess just like a mortgage broker would look at different lenders, you wouldn't want to go phone every lender in the country just to see what the right mortgage rate would be. I think most people are appreciative of insurance broking and mortgage broking, but possibly haven't thought about it in the same light with retirement.

speaker-0 (18:58.52)
For example, if somebody has a standard life pension or a legal in general, maybe picking those because they're just big names, they get to retirement, they get a retirement pack through, they're going to be getting a quote for an annuity with that provider. They're not getting a hold of market quote here. They're actually getting it from the provider. I think that some people may think, This is it. I've had my pension with them for thirty, forty years, my workplace scheme or whatever it might be. And here's my options. I can do this, I can do that, and here's my annuity, and they think that's all it is.

Some people do, some people don't. Depends how aware you are. And if you if you Google it, you might find out that there's more options. But again, that's a a bit of extra value we can add onto that.

speaker-1 (19:36.792)
And I get that, it's a good point. I suppose the other point when it comes to the retirement piece and then we'll move on to maybe some other interesting irreversible issues is for those who want to keep some flexibility, there's a whole process, isn't there? A building, kind of a staircase or different people use different language, whether it's cash flow modeling, buckets, ladders.

Either way, it's just about creating some form of differential outcome for the money that you don't want to put into annuity, whether that's some in growth, some in protection, some for immediate income. So there's a whole raft of different things that people need to know. How does the cash flow piece work? Because I know you do cash flow modeling, you, when it comes to retirement, so that you can actually see what people...

need to spend, what capital they think they're going to need to buy, when something's going to kick in. I mean, it's a real revelation, isn't it, when it's done well.

speaker-0 (20:41.962)
It is. And there are we we do use this all the time with clients. And it's it is it's so helpful to sort of get a picture of what is potentially can gonna happen, what can happen if you get it wrong. So for example, you could do a a very straightforward bit of cash flow analysis where you have assumptions such as growth rates for your investments, inflation rates, et cetera, all these basic assumptions of of going forwards. But what happens if

Something happens. You know, you've got you've got your money sitting in a drawdown scheme, for example, which is invested. It's in a portfolio. What happens if we follow some of the sell-offs we've had back in the day, you know, 1987, 2000s, Ukraine, we have the big one with COVID, et cetera? When you've got your money invested and you're drawing income from it and the market takes a bit of a tumble, you don't want to be drawing from underwater assets. And there are ways to sort of set set you up or set clients up.

With your buckets that you just mentioned to make sure that you have some sort of exposure to cash and nice, easy cash exposure somewhere, for example, so you don't have to sell down assets to pay that income. So it gets a bit more complex in this day. So I won't go to too much detail here, but I think it's the cash flow analysis can help us to understand what happens if. And one of the worst things that could happen to us a drawdown scheme, for example, and again, cash flow may help us to understand that.

Is if you retire today and tomorrow Donald Trump has one of his moments and the market falls twenty, thirty percent, that's a bad start to your retirement journey. And statistics tell us that looks bad. That's and that's not a great start. So the way you set yourself up from the beginning in retirement is so important to make sure you don't get slip up on any of those banana skins when the market doesn't do what you're expecting it to do.

speaker-1 (22:34.754)
Recently had a conversation with another trusted advisor we work with called Manish Kataria. He was talking about, he calls it, what is he called it, GPI, growth protection and income, and his process of doing that. it's similar. So good people will try and protect clients from something that just is unforeseen and sort of building in.

a bit of insurance against that unforeseen. It's something people can't really do on their own because they don't know the scope of what that unforeseen could be historically and may not see all of the nuances that you guys see. well enough on retirement. Let's talk about inheritance tax then because we touched on that a minute ago, didn't we, when we talked about when pension freedoms came in, the right to be able to choose.

where you invest, how you invest, how you draw income, basically accepting the risk. We didn't expect the risk to mean that if you think about it logically, anybody who's got money in a pot, pension, unless they annuitize all of it, exchange all of it for an income, they're going to have some money that's exposed to risk. And in order to balance being able to draw money when you don't know when you're going to expire,

you don't know how your health's going to be, you need to build in buffers. So if you're to build in buffers, the chances are when you finally and irreversibly, we talked about irreversible, the irreversible exit, you're probably going to have money left over. And if you've got money left over, that could be subject to inheritance tax, which I won't get on the soapbox this week because I've been on it for a few weeks now. I think it's a dreadful

to introduce to people who plan for decades or there I go on my soapbox again. What can a good IFA do to help someone see their way through this keeping the money but not having an inheritance tax to pay on it or at least minimizing them?

speaker-0 (24:50.594)
This landscape is becoming far more interesting and hitting a lot more clients. You know, a lot more clients are getting exposed to inheritance tax because of the way policy is changing, the way mil rate bands are frozen, have been frozen for a long, long time. And so it is a conversation that we wish we're having a lot with our clients. There are several strategies. They're very straightforward, actually. A lot of the solutions that we use are already in existence. So what we really need to start with is make sure we

understand what a client needs going forwards. And this is long term, you know, making sure that we we don't put them in a bad position in terms of the income we're generating from whatever asset and in what method we're using and making sure that that that's sort of future proofed in a way as well, making sure it's inflation proofed and they're not going to run out. So that's the starting point. Then we look at how what can we use, what tools can we use at our disposal to try and make that happen and also to give people a bit of a head start on

planning for the future and making sure they don't they they can control, I suppose, the estates better going forwards. So if you've got specifics, I suppose we're using annuities. An annuity is an income stream. Once you've bought the annuity, it doesn't have actually have a capital value at that point. It's just an income stream for life. And that's what it's designed to do. Whereas when you have a a pension in drawdown, as from April 2027, next year, coming up fast, that pension

does sit in your estate for inheritance tax from that moment. So an annuity being an income stream is incredibly helpful. Good starting point, nice easy thing to do. It takes some risk off the table. For some clients that's actually really helpful too.

speaker-1 (26:30.862)
best way of phrasing it, taking some risk off the table actually. I like that phrasing, it's a good one, because you don't want to have all the risk, and you do have all the risk once you've got all the money. And I also hear that inheritance tax is a tax on capital, not a tax on income. So hence the state pension is not subject to inheritance tax. Defined benefit pensions are not subject to inheritance tax. And annuities are not subject to inheritance tax, because their income streams, they're not capital.

So give us a couple of other ideas that people could be wrestling with without the detail because I know it's very easy to go down a rabbit hole. But what are some of the other things that might need to be considered, gain clarity on to then say, well, now you understand all of the options. Now let's circle back to work out what's most likely to be the right thing for your circumstances. A couple of other ideas on that.

speaker-0 (27:28.194)
Just a just a quick point of what we just spoke about before I move on to this. People are tending to try and retire younger. There's always a gap then between your retirement moment, 60, 57, whatever it may be, and the 67. You turned off your income stream here, your your your your employed or your business income stream, potentially. Not everybody, but it's and at that point, having a a definite amount of income for annuity, I think people feel a lot more comfort in that because it's there's something coming in every month.

Whereas if you go into straightforward drawdown mode with your pensions, you're just opening yourself up to risk straight away. So I just wanted to mention that because it it does dumbing down the risk is is actually quite useful in that respect. So moving on to a couple of other thoughts. The first one I wanted to mention is on pensions and what do you do with the tax free cash? The tax free cash is generally speaking twenty-five percent of the pot, as most of us would would know. A lot of people I speak to are wanting to just take that straight away. They just want to take it, keep it in this in the safety bucket over here.

This is their part of their oxygen mask, just to make sure that whatever goes wrong, they've got that then, as well as the pension. And then that that remains in their estate. So now you have adding on to the house that they own or flat that they own, adding on to any ISIS, all the other assets. That still becomes potentially a an inheritance tax red flag at some point. So what I wanted to mention about that is using that tax-free cash and maybe other cash which is floating around from other other sources, inheritances.

Siling businesses, whatever it may be, or downsizing, you can actually use or we're using a lot more these days, trust structures, which allow you to make gifts to your family, not directly, but you basically end up putting money into a trust and investing it. And there are certain types of trust which allow you to do that. You live for seven years, it's outside your state for inheritance tax, but you can still access it yourself. These types of solutions have been going for a long time, but they're becoming more prominent now.

And used because of what's happening next year with pensions. It's very flexible. You can generate an income stream. It's relatively tax efficient as well, the actual income stream that pops out of it. I won't go into detail, but it's it's relatively tax efficient. It's a tax-sheltered investment within the trust. In that way, you can not only take account of potential inheritance tax savings for your family using the tax-free cash and other cash that you may have around, which is a bit surplus to needs. Also comes out of your estate and you can generate a relatively tax.

speaker-0 (29:54.518)
advantageous income from it as well.

speaker-1 (29:56.926)
And I'm also aware, Andy, that you mentioned the sort seven-year rule in terms of the whenever you make a gift into a trust or even a gift directly from capital, the gift is only inherited tax-free after survival of seven years. But I'm aware, because you mentioned it to me in the past, that for those people who leave it relatively late, and perhaps they might be fearful of a seven-year longevity risk,

that there are specific plans that can accelerate that seven-year rule without using the technical terminology because that will just send people Googling and wrong. But there are special types of products that will allow that to happen and still get an income stream, but get rid of the inheritance tax liability more quickly. Is that true?

speaker-0 (30:44.824)
Some of that gift, yes. so I I don't know the I haven't got exact figures here for you, but if you put, I don't know, half a million pounds into a trust, some of that gift that you've you've made is immediately outside your estate, depending on how we set it up. It's not every trust works like that, but there's certain trusts that we w which you know about and I know about, which allow you to have some of that is immediately outside your estate for inheritance tax. Then there's a balance, whether that's three hundred thousand, three hundred and fifty thousand, which is then subject to the seven year rule.

But it immediately, as you say, discounts your estate and it's assumed that that's outside your estate now, that part of it, a very small part of it.

speaker-1 (31:21.838)
Okay, let's shift gears a bit, talk, because I like working with business owners. Business owners, because I like the fact that they're the backbone of society, they work bloody hard. They employ people, they've been bashed with national insurance, bashed with their own inheritance tax reliefs when they sell their businesses.

even if they sort of die with the business or even sell their business, you know, it's getting worse for them. But there are still one or two relatively good benefits for them other than pensions. And I'm thinking about in some cases when people have got families, well, you know, they're a business owner, but they've got a family and they haven't built their assets up just yet, but they want to protect their family. And very often they'll take out some form of...

life cover to pay the mortgage or life cover to pay the family should the worst happen and they not be around. What are the sort of things that a business owner can do that a person who's in employment cannot do?

speaker-0 (32:30.242)
This is a a big area for us actually. And not every business owner would know this, not every accountant would know this, actually. more to the point. And the the type of policy which we can have a business own and actually get tax benefits on the premiums is called a relevant life policy. sorry, sorry, relevant life policy.

speaker-1 (32:47.32)
that word again because you were quite quick.

speaker-1 (32:52.012)
Relevant, not that other cover is irrelevant, but I suppose we're not blessed with somehow inflicted by the fact that there's so much language choice that we get so common in our usage. So relevant life, so relevant for business owners in what way? What can they do that if they bought the cover, paid for it after they paid their dividend tax or their income tax or whatever?

speaker-0 (32:55.622)
Exactly.

speaker-1 (33:21.356)
Why is that a good thing? And why is it only available to business owners?

speaker-0 (33:26.136)
So it's a relevant life policy is it's a qualifying policy. It has to be set up in a certain way, it has to be a certain type of policy to actually be r owned by the business. And the business can offset the premiums as a business expense against profits so they can reduce their corporation tax bill. The policy itself will sit in a trust. The idea being that the i th there's a death claim, the policy pays out the death claim into the trust and it doesn't pay it into the individual's estate. So absolutely

speaker-1 (33:55.51)
It's a bit like then, if you work for an employer, which essentially this is, you might have life cover with your company, which some people might know is called Death in Service, but that's by the by. But because that's paid by the trustees with their discretion, hence the word discretionary trust.

It doesn't form part of the estate and it doesn't need to go via probate, which means time is saved because you don't have to wait for probate. Probate can take up to two years if your situation is complex, which means you could have a family waiting for cover to pay bills, pay mortgages, pay life for a couple of years. So this bypasses that, which is good. But you're also telling me the premium.

the cost of having the cover is deductible as an expense in the business.

speaker-0 (34:57.262)
Business. Correct. Absolutely. Which can make very large savings. The relevant life policies are priced exactly the same as a normal personal life policy. But if you put a normal personal life policy through the business, it counts as a benefit in kind, and you'll be paying tax on it. If you buy a normal personal policy yourself, you're going to be paying for it out of your own pocket after the business has been subject to national insurance. You've been taxed.

et cetera, and the business has been taxed, et cetera. So y you could save up to fifty percent in terms of the cost by putting it through the business.

speaker-1 (35:32.728)
So here's the question, why wouldn't every business owner who knows that not do that if they valued life govern?

speaker-0 (35:41.132)
I can't think of any other answer apart from all of them should.

speaker-1 (35:44.974)
The relevant life, really sensible thing for any business owner who values live cover. Let's talk about live cover in a different way. We know that you and I, both from different angles, will try and help someone reduce their inheritance tax bill. And we know that most people don't pay attention to inheritance tax because during a working month, a working year, a working life, they're paying attention to the taxes that

happening while they're alive. Nobody's paying attention to the tax when they find the exit, that irreversible exit. So once you have somebody who helps you with that, you establish your bill, you've done your damnedest to reduce it with as many different ideas as possible, but you just get to a place where there's going to be a tax bill and you have a little think and you're, well, if the tax bill is half a million quid,

The kids have got to sell something to pay the tax bill within six months. Don't want to have to sell anything because they're just going to undermine all the hard work I've done at building whatever I built as the asset. I'll cover it. I'll ensure it. So I'll make liquidity either fully available or partially available, bit like taking some of your risk off the table, take some of the liquidity off the table by ensuring.

If you Google that one, you're going to come up with the same argument every time, which is if inheritance tax is only paid on, let's take a family, on husband and wife, inheritance tax can be paid on the second death, because there's no inheritance tax between husband and wife. So every policy you see referred to is going to be a whole life policy, because you're going to live until you're not living, and then paid on the second death.

Everybody knows that in the industry is joint life, second death, whole of life. But that's not the only solution, is it? I mean, in some cases, it can be a lot cheaper if you just think outside the box. This is where you need good people like you to think outside the box. I learned this from you. I didn't learn this myself. So, you know, so thanks for sharing something. So tell us how the whole life policy works anyway, but then tell us what the alternative is.

speaker-1 (38:12.168)
so much cheaper but could deliver a similar benefit but there's a risk. Walk me through joint life, second death policy, why do people do those things and what happens because it's in trust as well but what happens?

speaker-0 (38:27.704)
Just a a quick caveat or a starting point before I go into this. When we start our journeys with clients to discuss inheritance tax, we don't know what it's going to end up like. We don't know what that final amount of inheritance tax is going to be. So things change over time. People manage over time. They hopefully will reduce their estates over time without damaging their own situation, financial situation. So that's a it's a moving feast, a moving object, the actual amount of inheritance tax that's levied at the end.

But the joint life second death holder life policy will do what it says in the 10. It's it's basically well you pay the premiums until you die, or the second person of a a relationship dies and it will pay out the amount of sum assured into a trust, assuming it's been set up properly, and that will then pay out and it's available to your beneficiaries before probate straight away. Again, as Kevin said, not to have any need to be selling assets.

assuming that the inheritance tax liability is is less than the amount you've got in the trust. So the alternative is, and we've done this with a few clients, is to look at maybe long dated, long term life policies, which can go up until the age of ninety. It's a straightforward level term policy, term insurance, which we do a lot of anyway. And it's not quite a relevant life policy because a relevant life policy is will only you can only do these until age seventy five within a business. But

We have set up some longer dated life policies, as I say, up until age ninety. You know, what's supposed the mortality of men and women in this country is probably lower than that, generally speaking. Some people live to a hundred. But at the end of the day, what it can do a long term, it tends to be cheaper than a whole of life policy because it's got a definite end. And the assumption is from the the life companies that one of you is gonna potentially live longer than that, you know, but kept kept alive in a care home, whatever it might be, at great cost to the the individual.

But chances are there may people may live longer than that. So that there is a a risk to you that you live longer than the ninety, and therefore you your your original strategy hasn't worked because you pay all those premiums over the years and it's not gonna pay out because it's expired at the age of ninety on the second death. But what it can be useful to think about a long dated policy, and if if we're talking about people who are sixties and seventies thinking about this, that's you know, twenty, thirty years of of protection.

speaker-0 (40:51.308)
Whilst you're working on your estates, it's it's a buffer, it's it's it's an insurance, it's a protection whilst you're working on your estates. Something happens prematurely, you know, God forbid, something happens prematurely, you know that an amount of money on second death, if it's both of you, will be paid into a trust to to fund inheritance tax. if you haven't quite managed to to get your estate down as much as you wanted to. So what all all all good plans laid down and you know

potential to reduce inheritance tax, downsizing, giving money, more money away to the kids when you get to the eighties and nineties and you don't need the money. But what happens in the meantime, if if things happen prematurely, you've you've got that cover in place, which is gonna cost a lot less than a whole of life policy, and provide your family with with that lump sum if things g don't go as planned. Yeah.

speaker-1 (41:42.958)
And I suppose that circles back to our opening conversation, which is, you know, a good IFA will help you get the clarity of your own thinking, be a good sounding board and help you make the right decision. There is no right decision here. It's just what you feel is the right decision for you because the difference in costs can be massive. I was talking to your colleague the other day and

I think it was a million quid cover or something. And I said, what's the difference? And she said it was like 18,000 a year for the whole of life, second death and 6,000 a year for the term. And we did some calculations and said, well, yes, there's a risk, but if you work, as you just said there, work on your plan, can get a, you you could, you could significantly

reduce the cost of managing that and at the same time work on reducing your inheritor's tax through a whole raft of means, which we didn't cover today, like equity release, taking money out of your home, gifting from income, gifting from capital and all those things. But sadly, we've run out of time. Yeah, well, that was enlightening. So Andy, if people want to get to know you,

speaker-0 (42:57.563)
speaker-1 (43:07.672)
want to find out a little bit more about you and even I know you give a free call to anybody who's on the podcast or listening to the podcast. How would they find out about you? Where would they find you? How would they engage with you?

speaker-0 (43:20.844)
I'm on LinkedIn. I don't I don't do a l huge amount of social media, to be honest with you. My children do, I don't. But I am on LinkedIn so you can get a hold of me that way.

speaker-1 (43:30.294)
Andy Cooper or Andrew Cooper?

speaker-0 (43:32.666)
Andrew Cooper. Okay, fair enough. Th there's about three hundred and fifty thousand of them in in the UK, so you couldn't so I'll just be

speaker-1 (43:41.684)
Your company you represent is called Kingswood Law IFA, that correct?

speaker-0 (43:48.034)
Correct. Yeah.

speaker-1 (43:49.614)
Yeah, and you know, I know you well enough. And you know, my kids were saying to me the other day, we have a get together every now and again and we talk about family stuff. And Kev, you've only got, they call me Kev, that's how respectful they are of me. You've only got 20 more holidays, Kev, where are you going to have them?

speaker-0 (44:07.502)
Twenty more Christmases. my goodness. Well.

speaker-1 (44:10.03)
And so there you go. when next time I ask you for my cashflow model, I want 20 first class holidays.

speaker-0 (44:21.262)
Thanks.

speaker-0 (44:25.23)
Jumped up.

speaker-1 (44:27.214)
We'll see where we get to, but Andy, thanks for your time today. Really appreciated that. And I'm sure as we discover more changes and as that heritage tax bites in 2027, there might be even more distinctions. And the insurance industry and the financial industry are creative people. I do wish sometimes their creativity would work in favor of the client as opposed to against them. And I'm sure we'll see that. So if we need to...

bring any more distinctions and differences that could help someone, you'd be happy to come along again and share that.

speaker-0 (45:02.286)
Hundred percent. And because as you say, policy changes over time, situations change over time, people change over time, there's always a a new thing to think about, a new way of doing things. Yeah. Well

speaker-1 (45:12.044)
not least, none of us expected the inheritance tax on pensions to come. So anybody who's got a pension and a family, they've got to do something with somebody. So reach out to Andy, we'll give you his details in the show notes. And until next time, everyone, see ya.

speaker-0 (45:32.558)
We hope you enjoy today's episode. Don't forget that we are constantly updating our resources inside the Wealth Builders membership site to help you create, build and protect your wealth. Head over to wealthbuilders.co.uk slash membership right now for free access. That's wealthbuilders.co.uk slash membership.