Wealth Planning in focus

Spring cleaning

Simon Wong, Wealth Planner

As a wealth planner, Simon Wong spends many hours delving into clients’ financial affairs at their behest in a bid to help them structure their wealth more tax efficiently or to put together a financial plan – be that to ensure they have funds available to fulfil their dreams or to pass on to the next generation.

He often comes across dust covered files that have been sent to him containing old legacy insurance policies many of which are either forgotten by clients or simply ignored on the basis that they don’t understand them, or their presumed value is insignificant. Some of which are little gems awaiting rediscovery whilst others are no longer fit for purpose.

To spur any holders of such policies into a spring clean, Simon has listed some of the more commonly held ones with a brief explanation and, where relevant, some action points.

Endowments

Endowments are regular savings contracts that include life assurance. They are a longer-term investment often taken out to run alongside a mortgage. At the end of the term (usually the same as the mortgage term), the endowment pays out accumulated returns. If the life-assured dies before the end of the term, the sum assured and any accumulated returns are paid out.

There are both unit-linked and with-profits varieties of endowment policies. An advantage of endowments is that the proceeds from a maturing policy are free of tax in the hands of the policyholder.

With-profits policies collect all the profits made (the surpluses on the funds of the provider company after expenses have been met) and then distribute a substantial amount of that profit in the form of bonuses. These are normally paid annually and, once they have been added, cannot be taken away. They offer a very safe investment, which tend to smooth investment returns.

With-profit policies have often received a poor press thanks to the difference between market returns and policy returns. In addition many legacy policies haven’t recovered from the market losses made back in the dotcom crash of 2000/1, so holders may well be sitting on long-term losses.

Holders can switch out but it is important to check individual policies for any guarantees, exit charges or market value reduction charges before any decision is made.

Problems with endowments have arisen where the maturity value projected falls short of the target amount, thus leaving a shortfall in the mortgage repayment. Policyholders have typically switched to repayment mortgages and left the endowments to run on to maturity. Although the proceeds of an endowment are tax free, the life funds invested within the contract are taxed at up to 20%. In some cases, there may be an advantage in seeking a more tax efficient home for this money, such as an ISA or Pension.

Flexible Whole of Life

These policies pay out the benefit whenever the life-assured dies. This means that as long as premiums are paid, a payout will be certain. Because of this, premiums tend to be more expensive than for term assurance.

You can choose a fixed sum assured, or one that is linked to the growth of investment markets. Those that are linked in this way are either "with profits" or "unit-linked".

Unit-linked policies are increasing in popularity and are linked to the investment funds of the life assurance company, the value of which can go down in value as well as up. The choice of funds is limited to that particular provider.

Issues have arisen where the regular premiums and investment funds are not sufficient to support the fixed sum assured at a review date (typically every 5 years). The options open to a policyholder often include i) an increase in the premiums to maintain the fixed sum assured or ii) maintain the premiums but suffer a reduction in the fixed sum assured. In some instances, an alternative contract may provide the cover required and the comfort of guaranteed premiums because of the absence of an investment element.

Trust based contracts

Trusts have been used by the Life Insurance industry for many purposes:

  • Put conditions on how and when your assets are distributed after you die;
  • Reduce estate and gift taxes;
  • Distribute assets to heirs efficiently without the cost, delay and publicity of probate court.
  • Better protect your assets from creditors and lawsuits.

These have been typically used in conjunction with whole of life contracts, life cover, investment bonds and estate planning bonds.

Issues arise where the appointed trustees may no longer be around or be suitable. It is very important to regularly review and possibly retire and appoint new trustees.

Other contracts

Over the years there have been a multitude of policies released by the Life and Pensions Industry, some of which are gems but others not as useful as one would have hoped for. All should be reviewed to determine their continued suitability. Other legacy contracts that are around include:

  • Investment Bonds
  • Estate Planning Bonds
  • Maximum Investment Plans
  • Pensions with Guaranteed Annuity Rates
  • Critical illness policies
  • Capped drawdown contracts
  • Flexible drawdown contracts
  • Retirement Annuity Contracts
  • Section 32 Buyout Bond
  • Executive Pension Plans

To arrange to meet one of our financial planners to discuss any legacy policies you might hold or another wealth issue, such as pensions or investment structuring, please contact your investment manager who will be happy to arrange a meeting.

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