Written by Mark Lambert, Head of Onshore Bond Distribution, HSBC Life (UK) Limited
Record numbers of over-65s are still currently working with the most recent Government data showing a 173,000 increase taking the current total still in the workforce to 1.468 million. However, they are not all in full-time employment. The Office for National Statistics data shows the rise was driven by more over-65s in part-time employment and the average hours worked by the age group have fallen. Industries seeing the biggest increases in these employees are hospitality, arts, entertainment and recreation where more informal employment is common.
But the UK Government data chimes with other trends in employment worldwide such as the rise of ‘unretirement’ which sees people who are eligible to take their state pensions returning to the workforce.
Global data from HR recruitment firm Randstad2 found the numbers who think they will retire before the age of 65 has dropped to 51% from 61% previously, and the World Economic Forum says employers are increasingly looking to the over-50s to fill gaps in their workforces particularly in more senior jobs.
The shift in employment patterns is likely being driven by a wide range of societal and economic factors including increasing longevity, falling birth rates and skills shortages. One issue underpinning it all for individuals is the need for income and it is an issue that advisers are increasingly dealing with.
The need for income
HSBC Life (UK)’s research3 for our report, The Three I’s of Investable Capital 20254, found 72% of advisers’ clients say they need an income from their investments, while 48% expect to continue to work and generate income beyond traditional retirement ages compared with 44% previously. Just 36% questioned in the research do not expect to work beyond traditional retirement ages.
Our research shows there has been a small but marked increase in the number of clients that advisers recognise have a current need for a regular income or payment from their investments.
While the proportion of advisers who have 60% or more clients with regular income needs remains unchanged since last year at 37%, there are some notable shifts. Around 36% of advisers have between 30% and 59% of clients with a need for regular payments from their investments.
A higher proportion of advisers – 32% in the recent research compared with 27% in previous research – said that in the region of 30% to 40% of clients draw on capital. Around two out of five (39%) of advised clients are using investments other than pensions to generate an income currently. That underlines the challenge for advisers to have a truly holistic understanding of their clients’ portfolios so that they can support them in the most tax efficient way.
How onshore investment bonds could help
Deciding how to draw a tax efficient and sustainable retirement income can be complicated, especially if a client has multiple investment types, for example ISAs, pensions and investment bonds. In this situation, where income could be taken from and in what order needs careful planning and onshore investment bonds can offer unique characteristics which could be considered as part of this.
Onshore investment bonds deliver valuable tax planning opportunities, with no liability to Capital Gains Tax (CGT) or basic rate income tax on the bond gains. Fund switches within the bond are also exempt from CGT.
At first glance, using an onshore investment bond to provide tax effective income looks inappropriate given it is a whole of life insurance product and essentially a non-income producing asset.
For individuals with a diverse range of investments, deciding how to draw down from these assets involves careful consideration. Key factors include optimising income received, minimising the tax paid and ensuring the remaining capital continues to grow tax-efficiently. Additionally, those with estates potentially subject to Inheritance Tax (IHT) will also need to evaluate how their investment strategy supports effective IHT planning.
Tax efficiency is clearly important when taking income from investments as the less tax paid means there is more money available to distribute.
There are choices when it comes to drawing funds from an onshore investment bond – part withdrawals within the tax deferred 5% allowance of the original capital invested, partial surrenders above this limit or full policy encashment using top slicing relief, with the latter giving rise to a chargeable event
Top slicing relief allows any gain to be averaged over the number of complete years the bond has been in force to assess any income tax liability. The 5% withdrawal provisions result in tax deferment. Full encashment combined with top slicing could, dependant on the amount of gain, years in force and client’s other income in the year of encashment, deliver tax-free access to the funds.
Generally the longer the bond has been in force, the greater the flexibility and opportunity for tax efficiency. With 5% withdrawals, it is worth remembering that if the advice fee is funded from the bond, this will be treated as a payment on behalf of the client and diminish the tax-deferred amount available for personal withdrawal.
We are working longer and traditional retirement ages are meaningless for more and more clients. The trend towards continuing to work and generate income is likely to continue so it makes sense for advisers to look at the full range of investment and income options for clients. People are working harder so investments have to work smarter.