Ask the Expert: Financial Services

What are the 'what if' scenarios of financial planning? Paul Howard of Fairstone Group explains further.

In September 2019 I will celebrate 50 years in Financial Services, or just "Insurance" as it was called back in the day.

Much has changed over the years. More changes to pensions legislation than you could imagine, culminating in the much heralded "Simplification" of pensions in 2006 and since when there have been over a hundred further changes. Changes to tax and trust law have had a significant impact on inheritance tax and the ability to pass wealth down the generations.

We have seen the introduction of "Dread Disease" insurance, now known as critical illness, first introduced in South Africa by the insurance company headed up by Marius Barnard, brother of Christian Barnard, who pioneered the first heart transplant. Marius realised that because of his brother’s pioneering work, more people were likely to survive serious illness than die, resulting in a policy that paid out on survival, not death.

There have been amazing developments in medical science and the diagnosis and treatment of serious illnesses, resulting in greater longevity. However, because of this, we are contracting illnesses and diseases that were generally unheard of by previous generations. This has resulted in the need to more seriously consider "at" retirement and "post" retirement planning to help people avoid outliving their wealth, especially with the demise of final salary pensions, guaranteeing an increasing income for life.

The only thing that hasn’t changed, is death and taxes (attributed to Benjamin Franklin, 1789).

The financial services market has seen huge change, especially around the advice process. Some due to the Regulation and the Financial Services Act, but much of it due to the need to act and react to all the changes that have happened. The challenges facing everyone have never been greater, whether employed, self-employed or a business owner, so there has never been a greater need for professional, independent financial advice.

The days of "my business is my pension" are long gone and what is most poignant about that statement is that previous generations of SME owners could boast that their businesses were indeed their pension, whilst still making substantial contributions to pension plans due to a more relaxed regime that hadn’t heard of annual or lifetime allowances, limiting contributions and the total value of pension savings. However, it’s not all bad news, as those who have saved prudently into their pensions can pass residual value on death to beneficiaries, subject in the latter case, to tax.

The savings and investment markets have seen unpresented change, with the demise of the traditional endowment policy, below-inflation interest rates and the increasing popularity of Investment ISAs for long-term saving. The ability to contribute up to £20,000 each tax year and the most recent change allowing the transfer on death of an ISA to a surviving spouse has made ISAs even more attractive. Plus, the ability to switch from growth to income taking tax free income has made ISAs even more important as a planning tool for "at" and "post" retirement.

One thing that has always surprised me when dealing with owners of SME companies is the reluctance to properly insure against the "what if" scenario. When meeting the owners/directors of a flourishing SME, I like to establish how the business started and did they imagine then, where they are now and where they hope to be in 5/10/15 plus years. The conversation usually goes well until I ask the question they prefer to ignore. What will happen if you, or those you depend on for the success of your business, die or are diagnosed with a serious long-term illness?

How many SMEs pay more to insure their cars than they do to insure their lives and their health? Let’s face it, no sensible business owner would operate without comprehensive business insurance, including loss of profits, so why do so many operate without adequate life, critical illness or health insurance for the only business asset that is irreplaceable?

Auto Enrolment has been with us now for some years. How many employers see its introduction purely as a cost, rather than a benefit, by providing a better than the basic default scheme as a way of rewarding loyalty and attracting quality staff?

And lastly, one thing that hasn’t changed throughout my career which goes way back to my initial introduction to the world of life, pensions and investment, is my belief to be straight talking and direct, especially when painting the "what if" scenarios. This goes back to one of the first people who influenced me, a highly successful American Life Insurance salesman and motivator called Norman Levine. One phrase he used has stuck with me throughout my career:

"pull the hearse up to the front door and let ‘em smell the flowers"

I’ll leave that thought with you.

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