Incoming inheritance tax liability on pensions is forcing financial advisors to change the amount of time they spend and what they discuss with clients, according to the latest UK financial advisor poll of Flagstone, a London-headquartered fintech company.

Seventy-nine per cent of UK financial advisors are spending more time discussing the implications of inheritance tax (IHT) on pensions with their clients, a new survey by Flagstone reveals.

Sixty-four per cent of advisors are also spending more time improving their own understanding of the shifting IHT framework, while 31 per cent are spending more time on compliance and documentation associated with the impending change to pensions.

Forty-three per cent of respondents feel disappointed that they don't have all the answers on the subject for their clients. Seventy-three per cent of advisors are also spending more time talking to clients about estate planning more generally.

“The plan to lift IHT exemption on pensions is causing vast changes to advisors’ working lives. They are grappling with what this all means for how best their clients can not only plan their estates but manage their day-to-day retirement spending,” Claire Jones (pictured), head of strategic relationships and new business at Flagstone, said. “It’s forcing some delicate conversations between clients and their families, and it must be frustrating for advisors to know that they haven’t yet got all the facts to hand to make the best possible strategic recommendations." 

“Rumours of changes to pensions tax relief only add to the complexity of the situation facing advisors right now. Speculation and extended deliberation are no good for anyone,” Jones continued. “The government needs to clarify its long-term intentions for pensions this Autumn, after which advisors can increase their own understanding and maximise the time left before changes take effect to get their clients’ affairs in order.” 

Flagstone’s poll also shows a shift in which strategies advisors are discussing the most with their clients. Regular gifting (84 per cent), irregular but substantial gifts (25 per cent) and spending pension money (76 per cent) are some of the strategies advisors are discussing most frequently with clients right now. This is caused by clients’ biggest concern: leaving tax bills for beneficiaries to handle. 

The survey comes ahead of the Autumn Budget when further tax rises are being mulled over. One consideration is abolishing the “seven year rule” which enables gifts to be exempt from IHT seven years before someone dies. This would squeeze the wealth of the UK’s middle class further, who are already being hit by the freeze in IHT thresholds at £325,000 ($440,000). See more commentary here.

“Actively gifting substantial sums before death demands a complicated overhaul of every client’s estate planning strategy. In addition to the data, what we’re hearing about anecdotally is a growing trend towards whole-of-life insurance policies that protect pensions in life and after death,” Jones said. “Whatever happens, it’s highly likely that more people of pensionable age will be drawing down higher volumes of cash than previously. Ensuring these clients are well-appraised of the cash management strategies available to them will be more important than ever too.”

“Many people don’t know the value of their pensions and will be caught off-guard when they realise the extent pensions can increase the value of their taxable estates from 2027,” Jonathan Pollock, Twelve Wealth Management, partner practice of St James’s Place, said. “People will also need to save for retirement and pensions are an extremely tax efficient way for the government to incentivise people to do so. I’ll always recommend clients to save into pensions. Where my advice is shifting is in regard to what people do with that pension money once in retirement. The hardest part of planning someone’s retirement with them is convincing them to spend the money they’ve spent 40 years accumulating. However, I expect we will see a lot more people take money out of their pensions and spend it from now on.”

“I have sensed an increasing willingness from clients to spend more for themselves in retirement. Overall, I expect tax-free cash and income from pensions to be taken earlier in the future,” Charlie Okell, FLM, partner practice of St James’s Place, added. “We are seeing a significant rise in interest around whole-of-life insurance policies, triggered by inheritance tax soon to be levied on pensions. Clients are looking at these policies to compliment a holistic financial plan.”

Launched in 2015, Flagstone is a large UK savings platform, with a number of banks and savings accounts on its panel. Flagstone customers have access to over 220 savings accounts from 69 of the UK’s savings providers.