The importance of having intergenerational objectives in mind throughout the financial planning journey (part 2)

Tax efficient accumulation enhances the wealth your client has to have the retirement they want and contributes towards a successful intergenerational transfer. But tax efficient decumulation preserves the financial capital they have built up to further enhance the chances of being able to pass on money to the next generation.

So how important is building tax efficiency into your decumulation strategy? Pretty important, we would say.

In our view, the best practice rules of successful decumulation are:

1. Minimise tax on what your client draws out. That way they will need to draw less (to pay tax and deliver the net sum they are aiming for) and will thus retain more capital.  Consider maximising their income tax allowances, the dividend allowance, the personal savings allowance and zero rate starting band for savings income.  Remember, it’s money (not necessarily “natural” income) that your client is looking for so don’t ignore drawing down on capital where this is appropriate and tax efficient – keeping the challenge of sequencing risk very much in mind of course.  The CGT exemption and a lower CGT rate can be very useful here. Also, let’s not forget the potential power of top slicing relief for investment bonds held over a relatively long period. For UK Bonds especially this could mean that quite substantial gains could be realised without any tax liability. The rules are long standing and potentially a little complex for clients to understand, but that’s what you’re there for! There’s also the potential to take tax deferred amounts using unused 5% withdrawal allowances if that gives a better outcome. Again, advice is absolutely essential here.
2. Minimise the tax on the income and gains produced by the funds left invested.  If it’s possible and if there are alternatives, avoid drawing down from funds invested in tax efficient environments – most obviously pensions and ISAs.  This allows remaining undrawn funds to continue to ‘thrive’.
3. Don’t draw down on funds that can be passed on IHT efficiently and look to draw from funds that cannot. For many clients with multiple assets to consider this may be eminently possible. In some cases (especially where the main assets are the home and the pension), it can pay to consider an appropriate lifetime mortgage with a resulting debt on the main residence but preservation of the tax efficient pension.

All of this ‘best practice’ leads to a general conclusion that, preserving capital has a significant impact for clients with a strong focus on leaving money for others to inherit.

Understandably, many concentrate on the ‘final transfer’ of assets to the next generation.  For the majority of people this will be on death and for couples, the death of the second person.  But good intergenerational planning should incorporate lifetime planning and be founded on a disciplined, tax effective accumulation and decumulation strategy.

When it comes to transferring wealth, minimising IHT is a very important component. Managed successfully, it will contribute hugely to your client’s goal of leaving their estate to the next generation.  As stated above, most couples will need to consider the minimisation of IHT on the death of the second person.  A low number of chargeable assets, with as many as possible exempt from IHT, will work in your client’s favour. This means that from a tax standpoint, their pension fund and any assets qualifying for business or agricultural relief work well.

The main impediments to lifetime giving are (and have pretty much always been) the need for retaining control over and access to the relevant assets.  The gift with reservation (GWR) rules, supplemented by the pre-owned assets tax (POAT) provisions, make these hurdles hard to overcome, while also making an IHT effective transfer.

For the right assets (and especially cash and appropriate investments) a trust can really help to deliver both control and access. You will all be aware of the flexibility and power of Gift Trusts, Loan Trusts, Discounted Gift Trusts and variations on those themes to deliver (sometimes in combination) the required level of control, access and IHT reduction.

Business relief investments do this too, without the need for another or any constraints on either control or access.

And let’s not forget the potential power of life insurance in trust, to:

• Create an inheritance or
• Meet the liability to IHT

In some cases, it can pay to take a lifetime mortgage on your main residence (creating an IHT deductible debt) to facilitate a lifetime gift.