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Planning a legacy? Insights from Income Manager Tool (IMT)

For financial professionals only

Perhaps unintentionally, a consequence of Pension Freedoms has been expanding the use of personal pensions for intergenerational planning1.

Younger people have generally invested less into pensions than their parents2 and taken on higher mortgage obligations than those starting in the 1980s. Anything this younger generation inherits to support their own retirement will be very useful, and this becomes a planning point when looking after family wealth.

Pension capital passed on at death before age 75 can now be used to produce a tax-free income to the beneficiary. As a result, we’ve seen intensified interest in drawdown (as opposed to annuity purchase). You can use Parmenion’s Income Manager Tool (IMT) to analyse some of the risks involved. It’s available as an integrated tool within our platform – just speak to your Regional Sales Manager or regular contact to turn it on.

Setting up a legacy in IMT

When entering details of a client’s pot in IMT, there’s an option to include a legacy amount.

In this example, a client with a £350,000 pot seeks the odds of achieving their income goals, which is the main function of IMT, but also wants an analysis of their likelihood of leaving a legacy of £125,000.

IMT works out how many simulations meet the test of staying above £125,000, while accounting for defined cash flows, year by year, and each potential year of life. Then, given the client’s survival likelihood for each year, IMT combines these analyses into a single viability score, to express the chance of the complete strategy working for the foreseeable future.

In our example, a client aged 60 wants to draw £12,000 from their Risk Grade 5 pot each year and their income to keep pace with inflation. On its own, that strategy has a fairly standard, 71% chance of success, with no legacy planning.

Impact of defined legacy

In all the simulations stretching out into extreme old age, the portfolio value must stay above £125,000 for the plan to work. So adding a minimum death benefit into the drawdown analysis reduces the likelihood of success. In this example, there’s a 50% chance of both the income being delivered and the legacy being available on death. This is a meaningful reduction in likelihood of overall success, compared to the drawdown strategy alone. But at 50% viability, there’s an even chance of having both as much income as needed and the £125,000 legacy. Whether that’s the right level of certainty obviously depends on the adviser’s assessment of individual preference and circumstances.

Other applications

This functionality within IMT can be applied to other tests, particularly weighing up capacity for loss on an analytical basis. IMT is answering the question: “What’s the chance I’ll never have less than a certain amount?”, and that’s relevant to many different situations.

Stochastic analysis can be difficult to explain to people. But being able to show the likelihood of always having more than a certain capital amount, expressed in familiar £ terms, can simplify things.

One of the reasons why we need to answer this type of question is that long-term care is a major wildcard factor in retirement planning. It’s impossible to strictly connect statistical generalisations and national averages to individual cases. For example, men and women are usually in care for different time periods. Average monthly costs for nursing care are around £35003, and most residents stay there for up to 3 years4. Testing for a minimum lifetime wealth of say, £100,000, pencilled in towards covering care, could improve a client’s composure and reduce anxiety about ever having to sell their home – which is such a common worry.

1 FT Adviser, Curtis Banks helpers advisers with intergenerational planning, January 2020.

2 Pensions Commission, Pensions: Challenges and choices. The first report of the Pensions Commission, 2004.

3 Care home fees and costs: How much do you pay? September 2021.

4 Julien Forder and Jose-Luis Fernandez, Length of stay in care homes, January 2011.

IMT Assumptions:

All IMT forecasts and regular withdrawals are expressed in real terms, in line with CPI. No adviser charge. Parmenion platform and portfolio costs included.

Male, DOB: 1/9/1961. Portfolio £350,000 invested in PIM Passive RG 5. Drawings £12,000 pa. Legacy £125,000.