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Anxiety attack

Financial advisers must take some responsibility for the lack of desire to close the pension and protection gaps

Tax saving is an important factor in retirement planning generally and pension planning specifically. But so it is in connection with protection.

Over the 10 years to 2003, we saw strong growth in protection sales in the UK. Since that time, however, sales have been falling and this year it is predicted that sales will remain flat.

UK protection sales are linked strongly to the housing market, which perhaps explains the trend in sales. Swiss Re has reported a 2.3trn protection gap in the UK. The reasons for this gap clearly go far beyond a lack of cover to protect mortgages. The basic lack of adequate financial protection for families and dependants is the main reason. As an industry, we have to take some responsibility for not creating sufficient justifiable anxiety over this gap.

Some years ago, everybody involved with sales of life insurance would have heard of the “Widow’s story”. This had its critics but, in many cases, it did create justifiable anxiety. By justifiable, I mean that there is a valid supportable reason, other than a purely emotional one, for a life insurance solution to a potentially devastating financial problem arising on the death of an individual.

Another contributing factor to the protection gap uncovered by Swiss Re is a widespread belief that the life cover that is in place, mainly through employer-related schemes, will be sufficient to cover the need.

Quite clearly, in these cases, a person responding to a question over the adequacy of the level of protection in place will respond: “I have already got cover” and not go any further to test whether the level of that cover is sufficient to meet their needs. The psychology behind this resistance to rigorously test adequacy against need can be seen in many aspects of financial life. We read about significant numbers of people whose inability to face the truth is evidenced by the simple non-opening of bills and an ostrich-like approach to outstanding credit card debt.

Most people in the financial services sector will be aware of the pension gap. The position has not been helped by the latest developments around the shortage of long-dated gilts, giving rise to an increase in their price, consequent reduction in yield and resulting diminution in cover for pension liabilities where significant investments are made into bonds by pension funds. This is so regardless of the relatively strong equity markets that we have seen recently.

As well as the aforementioned systematic reason, we also suffered a previous fall in equity values and abolition of the tax credit reclaim on dividends – all highly significant factors.

One of the other contributory reasons for the pension gap is the lack of desire among those with their very own pension gap to face the truth – so to speak – and then do something about it. As an industry, we have an incredibly important role to play in creating the necessary justifiable anxiety to close both the retirement and protection gaps.

I am concentrating, in this article at least, on the protection gap and looking at this as a market for financial advisers. How profitable can it be? Given the size of the gap and provided that the costs of writing business (both hard costs and time costs) can be minimised, the sector can prove extremely profitable.

But how about the competition? Well, of course, especially for the most straightforward individual protection, the adviser will be in competition. These days, any strong retail brand with a wide customer base will be looking to secure the maximum share of wallet from those customers and these retailers will not stay within their traditional boundaries. It is now well accepted that supermarkets sell intangibles such as banking and insurance products. Tyre-fitting companies also sell insurance. There is the 24/7 presence of the internet.

Most financial advisers will be aware of all this competition. In order to compete, they must consider their proposition to clients and, if necessary, reconstitute their offering with a clear articulation of the value that is added through advice rather than an unadvised purchase of insurance. The value should be capable of being shown through the discovery of need, the understanding of need, selection of appropriate products, design of the solution (incorporating a product), implementation and aftercare.

Advisers can also target more complex markets where the solution is demonstrably more than just a product. Having said that, even at the most mundane level, it is essential to point out to clients that, in most cases, a trust combined with a protection product will deliver a more effective solution than a product without a trust.

Even if inheritance tax is not seen as a problem by the client – and this is becoming less and less the case – the very existence of a product incorrectly written could create a liability to IHT. Even where IHT is generally not an issue and a liability will not be created by the policy if it is not written in trust, the existence of a trust in connection with a protection policy will ensure speedy payment of the policy proceeds to persons effectively designated as beneficiaries under the trust.

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