Tax year end protection planning opportunities

I’ve been speaking about using protection as part of a wealth strategy for many years now and the adage about protection providing the foundation for sound financial advice (anyone remember PIPSI?) has never been truer, especially at a time when stock markets may be viewed as volatile and uncertain. Protection can help de-risk clients and their assets by providing diversification away from stock market-linked investments, in exchange for mortality risk. At the same time this can protect your adviser income from falling values, or worse still, the critical illness or death of the client resulting in the withdrawal of monies by the family.

With a number of further proposed IHT changes announced in the Autumn Budget, contacting your clients and planning for the years ahead may be a great opportunity to not only review their mainstream protection needs, such as Income Protection, Life cover, Critical Illness and Children’s Cover, but also a number of wealth-related protection opportunities.

Now, I am not suggesting using protection instead of investments, but it can be used alongside them, to preserve the estate, or by generating a lump sum on death, used to meet a range of needs. The main risk being if clients can’t afford or stop paying their premiums, the policy ceases and they get nothing back, as modern-day protection has no investment value. However, protection policies offer the flexibility to reduce or increase the sum assured, and other family members could pay the premiums.

So, let’s take a look at some of the ‘life-stage’ events (during retirement) where protection can be used to preserve the value of a client’s estate:

IHT planning – future proofing your client’s legacy

You will no doubt be aware of rising IHT receipts, driven by property prices, investments and frozen nil-rate band, which are forecast to hit a new all-time high of £8.4bn in 2024/25¹. Following the proposed changes in the Autumn Budget, these are now forecast to rise to £14.3bn in 2029/30¹. Increasing numbers of estates are paying it, maybe due to clients misunderstanding the complexities of IHT or the belief they won’t be affected, which may result in leaving their IHT planning too late.

A guaranteed whole-of-life (WOL) policy written in trust on a joint life second event basis (i.e. death or terminal illness), can be used to meet the liability. So, assuming WOL rates are attractive, policies can add significant value over the premiums paid. Zurich has a Whole-of-Life calculator that helps you demonstrate this and the value of your recommendation. Further information is available here.

When tax-efficient ISA’s can cause a ‘taxable’ problem

Since the inheritable ISA rules were introduced in April 2015, there are many clients who may believe that ISAs are IHT-free. This isn’t generally the case. Whilst they are on first death for married couples and civil partners, because of the IHT spousal exemption, they aren’t for unmarried cohabiting couples (as there is no exemption), or on second death when the ISA becomes part of the taxable estate (unless held in AIMS investments, subject to proposed changes from April 2026). As a result, some clients with large IHT-able estates may continue to fund significant ISA pots each year, which then become liable to IHT.

A WOL policy written in trust on a joint life second event basis can be used to meet the liability, with premiums paid within their annual IHT exemption of £3,000 each, using any tax-efficient income received from their ISAs.

Creating a legacy for the next generation

Grandparents could use a WOL policy in a discretionary trust, to create a legacy for the next generation, on first or second event basis. Providing spare income (or capital) is available, it provides an opportunity to pay premiums (often within their annual IHT exemption of £3,000 each, for IHT-efficiency), to generate a much larger lump sum for their beneficiaries (for example, grand-children). Zurich’s Whole-of-Life calculator helps you demonstrate the value your recommendation is adding over the premiums paid.

This approach also provides control, as no lump sum is available until after death and then as it’s held in trust, their chosen trustees decide what is paid out, to whom and when. Plus, you get to build relationships with three generations of the same family, which could provide the opportunity to continue to keep family assets under your advice.

Funding for a pension shortfall

The approach of generating a lump sum on death, can also be used for clients who are concerned that on the death of the main pension recipient, the spouse’s pension may be insufficient to meet their ongoing income needs. This may include those who were unable to transfer from a defined benefit scheme, (especially public sector pension schemes), into a personal pension/drawdown arrangement, where the full fund value can be preserved for beneficiaries on death.

Using cashflow modelling to highlight the shortfall in the spouse’s pension, you can use current annuity rates to convert this annual pension shortfall into a lump sum, which in turn, can be used as the sum assured for a WOL policy (or term policy to age 90) written in trust on a joint life first event basis. On first death, the surviving spouse then has the choice of whether to buy an annuity (at current annuity rates at the time), take withdrawals from the trust or access the whole lump sum to do with as they wish.

And following the proposal in the Autumn Budget, to include unused pension funds and pensions death benefits in the client’s estate for IHT purposes from April 2027, a WOL policy, could be used to replace the reduced amount paid by the pension scheme to beneficiaries, as a result of the IHT payable.

Other examples using protection to generate a lump sum on death to help preserve a clients’ estate include:

• Protecting large gifts to grandchildren for education fees, property deposit etc – if these are in excess of their own nil-rate band and they die within 7 years, then there could be an IHT liability on the grandchildren. This can be protected by using a series of level term policies, in a gift inter-vivos style way.
• Increasingly, the bank of mum and dad or grandparents, are helping children or grandchildren get on the property ladder by gifting them money, whilst they are alive and can see them benefit from it. They may choose to fund this from capital or by using equity release or retirement interest-only mortgages. If they want to protect the full value of their estate for their beneficiaries, then they could use a WOL policy to cover the value of the gift or repayable loan.
• Another example could be to use protection to replace the estate value lost to long-term care costs/accommodation fees. A WOL policy in trust, could be used to generate a lump sum on the first event to either replace any care costs already incurred, or to pay for any care costs incurred by the surviving spouse. It could also be written on a second event basis to replace any local authority care cost debt against the estate. If no care costs are incurred, then they have created an extra legacy for their beneficiaries.

Access and control

In all these examples, a guaranteed WOL policy written in trust, (maybe with indexation), will provide reassurance for the customer, whilst continuing to give them access and control of their assets, which in turn, you will still manage and receive adviser income on.

Whilst there are other ways these events could be mitigated, sometimes it’s about presenting alternative solutions to clients that are simple and guaranteed to be paid out on death.

However, if after demonstrating the value being created by the WOL policy, the premiums are prohibitive for the customer, then you could consider using convertible term assurance. This will provide the cover they need, at a more affordable price, with the flexibility to convert to a WOL policy before the end of the term, with no further medical evidence - effectively protecting your clients’ health rating.

Business protection opportunities

Some of your clients may be business owners, where de-risking their business, by protecting employees, their families and the business, against critical illness or death, is important. There are nearly 6 million small businesses in the UK and according to the State of the Nation’s SME report² (which surveyed 500 small businesses in the UK):

• Only 25% of business owners had heard of relevant life policies (or executive income protection);
• 6 in 10 think they would cease trading within 1 year of losing a key person;
• 43% have no specific arrangements in place if a shareholder died;
• 75% have debt and the average borrowing is £200k, and a large proportion have no cover.

The use of relevant life (instead of a personal policy), key person or shareholder protection, not only helps them focus on succession planning, but could also offer tax savings on premiums, something that maybe of increased importance during the cost-of-living crisis.

And following the proposal in the Autumn Budget, to include unused pension funds and pensions death benefits in the client’s estate for IHT purposes from April 2027, a relevant life policy may become more attractive because it is not a pension arrangement. Therefore, it doesn’t fall under pension rules and so our expectation is that there will be no impact from the pensions IHT proposals.

For those businesses who already have business protection in place – much of which may be written on a 5-year reviewable basis – it may be an opportune time to review whether circumstances have changed. For example, have the:

• key people or shareholders changed – requiring new cover to be put in place.
• employees’ salary, bonuses, dividends changed – meaning they could be under/over insured and need to amend their sum assured.
• company value, profits or debts changed – requiring a change in sum assured.

We have a range of business protection solutions that can help protect against critical illness or death.

Support

Of course, getting clients to realise they should underpin their assets with protection can be difficult, but it’s worth remembering that clients aren’t buying a policy, they’re buying peace of mind and the reassurance that their wealth will be passed on intact to the next generation.

When writing this type of business, the amounts may be large, so to help support you we have a specialist Large Case Underwriting Team. During underwriting many clients will also benefit from our free Life cover during underwriting of up to £1.5m for personal and £2m for business protection.

I firmly believe that if you sell your wealth clients more protection, you’re likely to retain them and their investments through the generations for longer, and it may help preserve or even increase your adviser income.

If you’d like to find out more, you can:

• Speak to your usual Zurich contact.
• Find our contact details here.
• Register for one of our upcoming webinars.

Andy Woollon is a Technical Protection Specialist & Presenter at Zurich

Sources

¹HMRC Tax & NIC receipts 2023/24:

• https://assets.publishing.service.gov.uk/media/673634b7b613efc3f1823179/NS_Table.ods
• Section 4.30, pg90: https://obr.uk/docs/dlm_uploads/OBR_Economic_and_fiscal_outlook_March_2025.pdf

²Legal & General Business Protection State of the Nation’s SME report June 2021 (latest)