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Old gold

In my last article, I began to outline what I believe will prove to be among the most important developments in financial planning, the implications of which will need to be given a great deal of thought by all financial advisers.

A European ruling means that our Government will be obliged to introduce legislation by 2006 enabling all employees to continue working as long as they wish, subject to their mental and physical ability to continue in their job. I would therefore suggest that financial advisers should be talking urgently to their business clients about the financial planning implications of this legislation.

Having already considered the implications of this move on pensions and employer-sponsored death benefits, this week I would like to look at other group protection products and investment planning.

While in my last column I predicted the closure of an increasing number of group death benefit schemes, I am less certain of the certainty of the demise of group life insurance than I am of employer-sponsored income protection (permanent health insurance) and medical insurance.

You see, while the cost of providing life insurance to older employees is more than younger employees, the cost does not rise that much at the oldest ages as the underwriter knows that the cover will cease at an age below which relatively few people will die.

Even with the removal of mandatory retirement ages, the underwriter might assume that, before dying (without putting too fine a point on it), the older employee will retire through incapacity some months or years earlier.

This line of reasoning does not apply to income protection and medical insurance. An employee continuing in work to, say, 70 or 80 is obviously – and exponentially – more likely to fall ill. The cost, therefore of providing this person with income replacement, or especially private medical treatment, is prohibitive. Advisers to these schemes must take this message on board urgently.

But these are not the only advisers who need to act on this imminent development. Advisers to the employees must be aware, as I have outlined for life insurance, that this loss of employer-sponsored benefit creates a new need for private provision.

I confidently predict that sales of individual PHI and private medical insurance will go through the roof towards the end of this decade and, therefore, the smart IFA firms will position themselves accordingly over the next couple of years, not least by briefly discussing this likely development with appropriate clients.

For all these group risk benefits, I anticipate that, rather than incurring huge extra costs, these benefits will simply be removed. Employers will not be able to restrict benefits to younger employees, this representing the same ageism as the legislation is designed to prevent.

Briefly, on to investment planning. Many clients build portfolios at least partly to subsidise their income after retirement. Now we know that employed clients will not necessarily suffer this drop in earned income at a predetermined age, I would suggest that portfolio planning needs should be revisited.

Moreover, in light of the other issues I have discussed in these articles, I would be very surprised if the coming years do not see a small but significant redistribution of interest and funding from investment to protection as, in the latter category, employer-sponsored benefits are removed.

In summary, this is an issue which you will be hearing more and more about over the coming months. The smart IFA, acting upon this knowledge quickly, stands to gain a great deal of additional kudos and business before everyone else realises the importance of this imminent legislation.


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