Chapter 8 · Lifetime Financial Provision

The intended retirement age drives two key planning numbers:

• Accumulation horizon — how long you have to build up the pot. Longer = more time for compounding + more risk capacity
• Decumulation horizon — how long the pot must last in retirement. Modern life expectancy means planning for 25+ years post-retirement is prudent

A later retirement age means MORE time to save AND LESS time the savings need to last — double benefit.

State pensions in most jurisdictions are pay-as-you-go (PAYG) — current workers' contributions fund current pensioners' benefits. Entitlement is driven by the recipient's CONTRIBUTION RECORD (eg, qualifying years of National Insurance contributions in the UK).

Clients with incomplete records may be able to buy voluntary contributions to top up — often excellent value if they qualify.

The classic exam scenario: client needs a future income in today's purchasing power. Two-step calc:

1. Inflate today's required income to its future nominal value: Future income = Today × (1 + inflation)^years
2. Capitalise the future income as a perpetuity at the expected return: Capital = Future income / expected return

Sequencing risk is the danger that poor returns early in retirement, combined with withdrawals, deplete capital so much that the portfolio can't recover even if returns are great later.

It's why retirees often de-risk before retirement (the "glide path") — to reduce exposure to a bear market right when withdrawals begin.

• Contributory — both employer and employee pay in
• Non-contributory — employer funds the whole cost; employee contributes nothing

This is a separate dimension from DB/DC — you can have a contributory DB, non-contributory DB, contributory DC, etc.

For a DB scheme MEMBER, the pension depends on:

• Age at which benefits can be taken (eg, normal retirement age 65)
• Pensionable salary (final salary or career-average)
• Years of pensionable service
• Accrual rate (eg, 1/60th per year of service)
• Lump sum option (commutation of pension into tax-free cash)

Investment performance of the underlying fund is NOT relevant to the member's benefit — that risk sits with the employer/scheme.

A lifetime annuity converts a lump sum into a guaranteed income for life. The annuitant gives up the capital in exchange for income certainty + insurance against living longer than expected (longevity risk).

Annuity rates are mainly determined by:

• Long-dated gilt yields (insurers fund annuities from bond portfolios — higher yields = higher annuity rates)
• Annuitant's age and life expectancy
• Features chosen (joint life, escalation, guaranteed period)

Drawdown leaves the pension pot INVESTED in retirement and the saver withdraws income as needed. Pros: flexibility, can leave residual capital to heirs. Cons: saver bears investment risk AND longevity risk.

Trade-off vs annuity:

• Annuity = certainty, longevity protection, but no flexibility and capital lost on death (usually)
• Drawdown = flexibility, control, inheritability, but risk of running out

Often the best solution is a HYBRID — partial annuitisation to cover essential expenses, with the rest in drawdown for flexibility.

Term assurance pays a sum if the life assured dies WITHIN a specified term. If they survive the term, no payout. No investment element. Cheapest form of life cover for any given sum assured.

Whole-of-life assurance covers the insured for their ENTIRE LIFE — pays out whenever death occurs (not just within a term). Premiums are higher than equivalent term cover (because a payout is certain — only timing varies).

Often combined with an investment element. Useful for:

• Estate planning (paying inheritance tax — typically written in trust)
• Ensuring funeral / final expenses
• Permanent dependants' provision

In a life policy:

• Proposer / policyholder = the person who took out the policy and pays the premiums. The policy is THEIR asset.
• Life assured = the person whose death triggers the payout

These can be the SAME person ("own life" policy) or DIFFERENT people ("life of another" policy — eg, key person insurance, mortgage protection on a partner).

Insurable interest must exist at outset — you can't take out a policy on a random stranger. Unlimited insurable interest is presumed in your own life and your spouse/civil partner's life.

Insurance contracts (including life assurance) are governed by the principle of UTMOST GOOD FAITH: both parties must disclose all MATERIAL FACTS, even if not asked. Non-disclosure of a material fact can void the contract.

This is stricter than the standard contract principle of "caveat emptor" (buyer beware) because the insurer can't realistically investigate every aspect of the applicant's life — it relies on the applicant's honest disclosure.

Pays a TAX-FREE LUMP SUM on diagnosis of a specified critical illness (eg, certain cancers, heart attack, stroke). Payable regardless of survival outcome — unlike life cover.

Useful for: clearing debts, funding treatment costs, replacing lost income during recovery.

Pays a REGULAR INCOME (% of pre-disability earnings) if the insured is unable to work due to illness/injury. Crucial difference from critical illness: IP pays as long as the person can't work, even for many years, while critical illness pays a one-off lump sum on diagnosis.

Key features:

• Deferred period — wait time before benefits start (eg, 4 weeks, 6 months). Longer deferred = cheaper premium.
• Benefit term — until return to work, retirement, or end of policy. Usually to retirement age.
• Own-occupation vs any-occupation definition — own-occupation is stricter (pays if you can't do YOUR job)

ASU (Accident, Sickness & Unemployment) is short-term cover (usually 12-24 months max payout). Cheaper than IP but provides limited protection. Often sold alongside mortgages or loans.

For meaningful long-term income protection, IP is the proper product — ASU is a stopgap.

LTC plans address the cost of personal care needs in older age — residential care home fees can run to £50k+/year in the UK. Common solutions:

• Immediate needs annuity — bought at point of needing care; pays guaranteed income directly to care provider for life
• Pre-funded LTC insurance — purchased earlier (less common now in the UK; was withdrawn by many providers)
• Self-funding from assets (often the default)

The BUSINESS takes out a life and/or critical illness policy on a KEY EMPLOYEE (founder, top salesperson, key technical specialist). On death or critical illness, the business receives a lump sum to cover:

• Lost profits during transition
• Cost of recruiting and training a replacement
• Repaying loans personally guaranteed by the key person

The business is BOTH the policy owner AND the beneficiary. The key person is the life assured.

Designed to give the SURVIVING owners funds to buy out a deceased shareholder's interest from their estate, keeping control of the business. Typically structured via:

1. Each shareholder takes out life cover on their own life
2. A cross-option agreement gives surviving shareholders the option to buy (and the deceased's estate the option to sell) the deceased's shares at fair value
3. The life cover provides the cash to fund the buyout

Result: surviving shareholders gain full control; deceased's family gets cash (often tax-efficient via trust) instead of an illiquid minority stake.

A will is a legal document that sets out how a person's estate should be distributed on death and appoints EXECUTORS to administer it. Can be amended (codicil) or revoked during life, subject to formal requirements.

If a person dies WITHOUT a valid will, they die "intestate" — assets are distributed by statutory rules that may differ markedly from what the deceased would have wanted (eg, unmarried partners often get nothing).

Inheritance Tax (IHT) in the UK is levied on the value of the deceased's estate above the nil-rate band (currently £325k, plus an additional £175k residence nil-rate band for a main home left to direct descendants). The rate above these thresholds is generally 40%.

Lifetime gifting can be effective planning because gifts fall OUT of the estate for IHT purposes after seven years (Potentially Exempt Transfers / "the 7-year rule").

Life assurance written IN TRUST keeps the payout OUTSIDE the estate — beneficiaries get cash quickly (no waiting for probate) and the proceeds don't add to the IHT bill.

For most estate-tax purposes, liability is driven by:

• Domicile — the country regarded as the person's PERMANENT home. Harder to change than residence. Determines worldwide exposure to estate tax in most regimes.
• Residence — where the person is tax-resident year by year. Drives income tax and capital gains tax exposure.
• Situs of assets — where assets are physically located. Matters particularly for non-domiciled individuals (taxed only on local-situs assets in some jurisdictions).

A Power of Attorney (POA) is a legal document authorising another person (the attorney) to act on the donor's behalf. Critical varieties:

• Ordinary POA — ceases on incapacity
• Lasting / durable POA — CONTINUES (or activates) when the donor loses mental capacity. Essential for long-term planning.
• Separate POAs may cover property & financial affairs and health & welfare decisions

If a client loses capacity, the adviser CANNOT continue acting on their direct instructions or use their own judgement. They must wait for:

1. An ATTORNEY (under an existing LPA) to give instructions, OR
2. A court-appointed DEPUTY to take over

Acting without proper authority risks breach of fiduciary duty and exposes the firm to legal claims.

A trust separates legal and beneficial ownership of assets. Three core parties:

• Settlor — creates the trust and transfers assets in
• Trustee — holds LEGAL TITLE to the assets and manages them for the beneficiaries. Owes fiduciary duties.
• Beneficiary — holds BENEFICIAL/EQUITABLE INTEREST; the person the trust is for

Optional: a trust protector can be appointed to oversee trustees and exercise certain powers (eg, replace trustees).

A foundation (Stiftung in German, Fondation in French) is a separate LEGAL ENTITY with its own personality, used for similar purposes to trusts (succession, asset protection) — particularly common in civil-law jurisdictions that don't fully recognise common-law trusts (eg, Liechtenstein, Panama, Switzerland).

Differences from trusts:

• Foundation OWNS its own assets (vs trustees holding for beneficiaries)
• Governed by statutes/charter
• Can pursue purposes (eg, family welfare, charitable) rather than just benefit named beneficiaries

A FIC is a private limited company set up to hold family wealth across generations. Has become increasingly popular in the UK as trust tax regimes have tightened. Features:

• Founders typically hold voting shares (control) while non-voting shares pass to next generation (value)
• Profits taxed at corporation tax rate (often lower than personal trust rates)
• Provides governance structure for managing family wealth