How Does Protection Planning Change When You Retire?

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As you work towards financial independence, protection is an important part of the plan. Having the right insurance can mean that your financial plan stays on track, even if the unexpected happens.

A comfortable retirement is a major goal for most people, and achieving it is the culmination of years of planning. Many of the risks and responsibilities that apply throughout your working life are no longer an issue.

So how should you approach protection planning when you retire?

Wills and Powers of Attorney

One of the most important aspects of protection planning in retirement is to ensure that your existing assets are dealt with in the way you wish.

Having a Will means that your estate can be distributed in the way you require, with minimal delay.

A Power of Attorney (POA) can ensure that your health and financial decisions are taken care of by someone you trust, even if you lose capacity.

When you retire, this is an ideal time to complete your Will and POA, or to review your existing provision.

Whole of Life Cover

In retirement, the focus can shift from protection to transference of wealth. Your loved ones may not ‘need’ to receive a lump sum on your death, but you could be considering ways of passing on your money without paying excessive Inheritance Tax (IHT).

A whole of life plan is one way of achieving this. It works as follows:

•         You pay a monthly premium for the cover. Providing this is no more than £3,000 per year, or is paid out of surplus income (rather than capital) the premiums will be outside your estate for IHT purposes.

•           If the premiums are over £3,000 per year and don’t meet the criteria to be gifts made out of surplus income, the excess premiums will drop out of your estate after seven years.

•           The premiums may increase over time, so it’s worth reviewing the plan regularly.

•           The plan has no expiry date, so will pay out a lump sum when you die, regardless of age.

•          The plan is normally set up in trust. This means that the policy benefits don’t form part of your estate (and therefore don’t further increase your IHT bill) and the benefits can be paid out to the trustees more quickly without having to wait for probate to be granted.

•           No IHT would apply on death as long as the benefits are written in trust, although depending on the value and the structure of the trust, some tax may be payable by the trustees.

A whole of life plan can be used to pay IHT, or to provide a ring-fenced legacy for your beneficiaries that is not subject to probate procedures.

Term Assurance

Term assurance pays out a lump sum if you die.

Most people take out a term assurance to cover their mortgage or to provide for dependent children. If you are retired, these probably no longer apply.

Of course, there may be specific reasons why you still need life cover for a fixed period. For example, if you receive an occupational scheme pension and have a younger spouse, they would most likely receive a reduced pension on your death. Life cover could provide your spouse with some security in the years before they can draw their own pension.

Term assurance can also have a role to play in Inheritance Tax planning. If you make a gift, in most cases this will remain within your estate for seven years. A seven year term assurance could allow the tax to be paid if you die within the period.

Over 50s Plans

Over 50s plans are a staple of daytime television advertising. They offer a guaranteed lump sum on death, with minimal underwriting and a simple application process.

However, it’s not unusual for the total value of the premiums to exceed the payout. They are based on a typical life expectancy, so if you are in good health, you can expect to pay more in than your loved ones receive in return.

On the other hand, over 50s plans can offer reasonable value if you are in poor health, wish to leave behind a lump sum, and do not have significant capital to pass on.

Private Medical Insurance

If your employer provides private healthcare, you will lose this when you retire.

You can take out medical insurance for yourself, although this can be expensive.

It’s worth weighing up the benefits of private medical insurance with the cost. Insurance is designed to cover short-term illnesses and injuries so that you don’t have to wait for treatment on the NHS. It is not so useful in the case of chronic conditions.

Some policies will have an upper age limit, so remember to check this before you apply.

Read the policy conditions carefully. You may feel that you can afford to pay for private treatment if it is required.

Critical Illness

A critical illness plan pays out a lump sum if you are diagnosed with a serious illness from a specified list.

If you are retired, your financial responsibilities will probably be reduced. But the chances of being ill increase with age, and a critical illness plan could provide a valuable safety net. The money could be put towards private medical costs, care, or help at home while you recover. You may also need to make changes to your property or car.

So if you have a critical illness plan, it could be worth keeping it even when you retire, providing the premiums are affordable.

Obtaining new critical illness cover is a different matter. Premiums become more expensive as you get older, particularly if you have pre-existing health conditions. A history of illness could even result in the cover being declined.

The need for critical illness cover will depend on your individual situation.

Income Protection

Income protection pays out a regular income if you are unable to work for health reasons.

Clearly, when you retire, this is no longer required.

If you have an existing income protection plan that extends beyond your retirement age, you may want to cancel it when you retire. Not only because you no longer need it, but also because it probably wouldn’t pay out if you are no longer working, but receiving income from another source.

There are no penalties for cancelling an income protection policy – the cover simply stops. However, you don’t receive any of your premiums back and the plan doesn’t build up a value.

The requirement for protection doesn’t simply stop when you retire. Rather, the focus changes from ensuring financial security to protecting what you have built up for yourself and your loved ones. 

Please don’t hesitate to contact a member of the team to find out more about your protection options.

The Financial Conduct Authority does not regulate tax advice, Wills or Trusts