If the worst were to happen, would your bills still get paid?

Everyone should consider protection, even those who don’t have a family or a mortgage! Unless they have substantial savings or inherited wealth, most people rely on their salary to pay for everything. Over the years, you may have taken out a number of different insurance policies to give you and your family financial security. Perhaps this may have been when you started a family, took out a mortgage or became self-employed.

These policies are designed to give your loved ones peace of mind by helping make sure there will be enough money in place to cover bills and other expenses should you become critically ill, be unable to work or even die.

Although state benefits provide some support, few families want to rely on the state to maintain their standard of living. It is therefore crucial to keep abreast of the level of your cover.

Time to review

Your personal circumstances and needs will almost certainly have changed over time. Perhaps you have children who have since flown the nest, or you’ve paid off your mortgage.

You may also be entitled to benefits with your current employer that either overlap with polices you already have or leave things now important to you not covered.
It could be time to review these policies, and the level of cover they provide, to make sure they are still suitable.

Life cover protection

Life cover protection is designed to protect your family and other people who may depend on you for financial support. It pays a death benefit to the beneficiary of the life assurance policy.

If you have dependents or outstanding debts such as a mortgage, at the very least it should ensure your family can keep their home, but ideally it would also provide an additional sum as a financial buffer at a difficult time.

There are different types of policy available, from ‘whole of life assurance’ which covers you for your entire lifetime, to ‘term assurance’ policies which provide life cover for a fixed period of time – 10 or 20 years, for example – and are often used in conjunction with a mortgage.

Income protection cover

If something happened to you, would you be able to survive on your savings or on sick pay provided by your employer? If not, you’ll need some other way to keep paying the bills.

Income protection cover is designed to give you protection if you can’t earn an income due to ill health, a sickness or disability. These policies protect a portion of your salary, typically paying out between 50–70% of your income. You receive monthly, tax-free payments that cover some of your lost earnings if you are unable to work.
They are vital policies for those with dependents and liabilities, paying out until you can start working again, or until you retire, die or the end of the policy term – whichever is sooner. They cover most illnesses that leave you unable to work, and you can claim as many times as you need to while the policy lasts.

Critical illness cover

If you are diagnosed with a critical illness, it can have a severe impact on your finances, as you may need to take time off work for your treatment and recovery. Critical illness cover pays out a tax-free lump sum if you’re diagnosed with, or undergo surgery for, a specified critical illness that meets the policy definition.

It’s designed to help support you and your family financially while you deal with your diagnosis, so you can focus on your recovery without worrying about how the bills will be paid.

Each policy will have its own list of specified conditions it covers, and it is vital to familiarise yourself with the full list and when you can claim for these illnesses before you apply.

Family income benefit cover

Family income benefit is a term insurance which lasts for a set period of time. If something were to happen to you, you would want to be sure your family is taken care of when you’re gone.

The policy will pay out a monthly, tax-free income to your family if you die during the term, until the policy ends. So, if you take a 20-year family income benefit policy and die after five years, it will continue to pay out for another 15 years.

There is no cash in value, so if you stop making premium payments, your cover will end.

Private medical insurance

Private medical insurance will pay for the cost of private healthcare treatment if you are sick or injured. If you don’t already have it as part of your employee benefits package, and you can afford to pay the premiums, you might decide it’s worth paying extra to have more choice over your care.

It gives you a choice in the level of care you get and how and when it is provided. Basic private medical insurance usually picks up the costs of most in-patient treatments (tests and surgery) and day-care surgery.

Some policies extend to out-patient treatments (such as specialists and consultants) and might pay you a small fixed amount for each night you spend in an NHS hospital. Premiums are paid monthly or annually, but most policies do not cover pre-existing conditions.

THE PLAN WILL HAVE NO CASH IN VALUE AT ANY TIME AND WILL CEASE AT THE END OF THE TERM. IF PREMIUMS ARE NOT MAINTAINED, THEN COVER WILL LAPSE.

CRITICAL ILLNESS PLANS MAY NOT COVER ALL THE DEFINITIONS OF A CRITICAL ILLNESS. THE DEFINITIONS VARY BETWEEN PRODUCT PROVIDERS AND WILL BE DESCRIBED IN THE KEY FEATURES AND POLICY DOCUMENT IF YOU GO AHEAD WITH A PLAN.

Reaching the big 50 can be a financial wake-up call

Your 50s are a crunch time when saving for your retirement. If you’ve already set a retirement savings target but have been neglecting it, the reality is that now you can’t afford to delay your planning any further – and it’s time for a careful review.

Are you on track to retire when you want to? Do you have enough in your pension pot to retire comfortably? A comfortable lifestyle means different things to different people. If you’re in your 50s, it’s important to make retirement planning a priority if you haven’t done so already. At this age, retirement is no longer a distant concept, and time is short if your plans aren’t on track.

Will you have enough money for retirement?

One of the advantages you have in your 50s is that you are no longer relying on very long-term projections to determine if you have enough for retirement. The decision to retire will also depend on how financially independent you are, how healthy you are and even perhaps whether you have hobbies or goals you’ll want to pursue.

Now is the time to think about your retirement income goals and the steps that you need to take to achieve your goals. One of the most important things to do in your 50s is to work out how much money you’ll need to retire comfortably.

There are many variables to consider, including the age that you plan to retire, your life expectancy, your income requirements in retirement, your expected investment returns, inflation, tax rates and whether you qualify for the State Pension.

Given the number of variables, this part of the retirement planning process is not always straightforward.

Do you know the answer to these questions?

Q: When do I want to retire?
Q: How much income do I want in retirement?
Q: Do I have previous personal or company pension plans that need reviewing?
Q: Can I work part-time and take some of my pension?
Q: How much will my State Pension be?
Q: Where is my pension money invested, and is it growing?
Q: Can I retire early?

Providing you with more clarity

Nowadays, it’s common for many people to have accumulated an array of different pension agreements throughout their working life. By the time you have been working for a decade or two, you may have accumulated multiple pension plans on your career journey.

If appropriate, it may be worth considering a pension consolidation at this stage of your retirement planning process. This could provide you with more clarity in relation to your overall pension savings and make it easier to plan for your retirement. You may also benefit from lower costs.

But not all pension types can or should be transferred. It’s important that you know and compare the features and benefits of the different pension agreements you are thinking of transferring. It is a complex decision to work out whether you would be better or worse off combining your pensions.

Alternative way to grow your pension savings

In your 50s, one alternative way to grow your pension savings is to save money regularly into a Self-Invested Personal Pension (SIPP) account. This is a government-approved retirement account that enables you to hold a wide range of investments and shelters capital gains and income from HM Revenue & Customs (HMRC).

SIPP contributions receive tax relief. Basic-rate taxpayers benefit from 20% tax relief, meaning an £800 contribution is topped up to £1,000 by the Government, while higher-rate taxpayers and additional-rate taxpayers can claim an extra 20% and 25% tax relief respectively through their tax returns. Please note that the tax relief claimed from your tax return won’t be automatically added to your SIPP.

There is a limit to how much tax relief you are entitled to. It is currently applicable to contributions up to £40,000 or 100% of your earnings – whichever is lower. Another special feature is the three-year carry-forward rule. This rule allows you to carry the last three tax years’ annual allowance into the current tax year.

This is a useful feature for people who were unable to use up their annual allowances in the past but have the ability to do so for the current tax year. You must use this year’s allowance before using the carry forward rule.

There is also the option to invest within a Stocks & Shares ISA. Like the SIPP, this type of account allows you to hold a wide range of investments, and all capital gains and income are sheltered from HMRC. Each individual can contribute £20,000 per year into a Stocks & Shares ISA.

Good time to review your asset allocation

Your 50s is also a good time to review your asset allocation. You’ll want to ensure that your asset allocation matches your risk profile now that you are getting closer to retirement. As you move closer to retirement, and if appropriate to your situation, it may be sensible to begin reducing your exposure to higher-risk assets such as equities.

You need to pay close attention to your asset allocation and consider de-risking your portfolio. With retirement just around the corner, you don’t want to be overexposed to the stock market, as there is less time to recover from a major stock market correction.

If retirement beckons in the short to medium term, you may look to build a sustainable portfolio with perhaps an emphasis on greater income and reduced volatility and risk. However, moving away from an exposure to growth assets entirely or too early can be very expensive, so it’s essential you obtain professional financial advice before taking any action.

Unless your situation is unusual, some retention of these growth assets is going to be required during a retirement that could last more than 30 years. It’s important to balance the need for liquidity and an exposure to growth assets.

Review your retirement planning on a regular basis

Finally, in your 50s, it’s important to review your retirement planning on a regular basis. As with any other aspect of your personal finances, it’s essential to conduct regular reviews of your pension arrangements to ensure that they fit best with your current situation.

A regular review will ensure healthy progression towards retirement by checking that you are firmly on track with your retirement goals. This is the time to adjust your plan to fit any evolving needs and desires for your post-retirement years. We all change as people over time, and our pension pot needs to reflect our most current reality.

Retirement planning is a continual process, and the more often you review your progress, the more prepared you’ll be for retirement and the more in control you’ll feel. At a minimum, aim to review your retirement planning at least once annually to ensure that you’re on track to achieving your retirement goals.

A PENSION IS A LONG-TERM INVESTMENT.

TRANSFERRING OUT OF A FINAL SALARY SCHEME IS UNLIKELY TO BE IN THE BEST INTERESTS OF MOST PEOPLE.

THE FUND VALUE MAY FLUCTUATE
AND CAN GO DOWN, WHICH WOULD HAVE
AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS TESTED BENEFITS AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

Self-employed business owners face unique challenges

Saving for retirement can be more challenging when you are self-employed, as there is no one to organise a pension for you and no employer making contributions on your behalf. On top of that, self-employed workers often don’t have a regular income, so many will focus on setting aside money as a safety net if they cannot work.

New research shows[1] that some self-employed workers are heading towards a pension saving crisis as they cannot afford to save for their retirement.

Less comfortable retirement

The nationwide study found more than two fifths (43%) of those working for themselves admit they do not have a pension, compared to just 4% of those in employment – a key reason is that 36% of the self-employed say they cannot afford to save for retirement.

Self-employed workers now make up 15.1% of the UK workforce, with more than 4.8 million people working for themselves[2], but the research found they are heading for a less comfortable retirement with many not planning to stop work.

Day-to-day emergencies

Around one in three (31%) say they will be relying entirely on the State Pension to fund their retirement, while 28% will be reliant on their business to provide the income they need.

Self-employed workers are savers, but the research found they are more focused on day-to-day emergencies than the long term of retirement. Two thirds (64%) of the self-employed save to build up a safety net in case of an emergency, in comparison with 57% of those in employment.

More complex requirements

Just one in ten self-employed people receive professional advice from a financial adviser regularly, despite having potentially more complex requirements than someone in employment. One in five (19%) are not confident with money and financial matters, while a quarter (24%) worry that they do not know enough about money.

All this adds up to an advice gap when it comes to the importance of pensions for the self-employed, as 20% admit they do not take pension saving seriously as they do not think it applies to them.

No one wants to work forever

Saving for a pension is still important, as no one wants to work forever. And no matter what your employment status, having money to fund your retirement is essential, as the State Pension is unlikely to be enough to fund a comfortable retirement.

The earlier you start contributing to a pension, the bigger your retirement pot should eventually be, as your money will have a longer chance to grow, and you will have paid more in over a longer period. The more you can save, the greater the chance you will enjoy a financially comfortable retirement when you stop work.

Source data:
[1] Consumer Intelligence conducted an independent online survey for Prudential between 20 and 21 June 2018 among 1,178 UK adults

[2] https://www.ons.gov.uk/employmentandlabourmarket/peopleinworkemploymentandemployeetypes/articles/trendsinselfemploymentintheuk/2018-02-07

What does wealth look like to you?

Whether it’s stopping smoking, losing weight, eating more healthily or getting fitter, most of us have probably made at least one New Year’s resolution, but how many of us will actually go on to achieve it? We all have different financial goals and aspirations in life, yet these goals can often seem out of reach. In today’s complex financial environment, achieving your financial goals may not be that straightforward.

This is where financial planning is essential. Designed to help secure your financial future, a financial plan seeks to identify your financial goals, prioritise them and then outline the exact steps that you need to take to achieve your goals.

If your New Year’s resolutions include giving your financial plans an overhaul, here are our tips to help you create a robust financial plan for 2020 and beyond.

Be specific about your objectives

Any goal (let alone financial) without a clear objective is nothing more than a pipe dream, and this couldn’t be more true when setting financial goals.
It is often said that saving and investing are nothing more than deferred consumption. Therefore, you need to be crystal clear about why you are doing what you’re doing. This could be planning for your children’s education, your retirement, that dream holiday or a property purchase.

Once the objective is clear, it’s important to put a monetary value to that goal and the time frame you want to achieve it by. The important point is to list all of your goal objectives, however small they may be, that you foresee in the future and put a value to them.

Keep them realistic

It’s good to be an optimistic person, but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, being overly unrealistic can definitely impact on your chances of achieving them.

It’s important to keep your goals realistic, as it will help you stay the course and keep you motivated throughout your journey until you get to your destination.

Short, medium and long-term

Now you need to plan for where you want to get to, which will likely involve looking at how much you need to save and invest to achieve your goals. The approach towards achieving every financial goal will not be the same, which is why you need to divide your goals into short, medium and long-term time horizons.

As a rule of thumb, any financial goal which is due within a five-year period should be considered short-term. Medium-term goals are typically based on a five-year to ten-year time horizon, and over ten years these goals are classed as long-term.

This division of goals into short, medium and long-term will help in choosing the right savings and investments approach to help you achieve them, and it will also make them crystal clear. This will involve looking at what large purchases you expect to make, such as purchasing property or renovating your home, as well as considering the later stages of your life and when you’ll eventually retire.

Always account for inflation

It’s often said that inflation is taxation without legislation. Therefore, you need to account for inflation whenever you are putting a monetary value to a financial goal that is far away in the future. It’s important to know the inflation rate when you’re thinking about saving and investing, since it will make a big difference to whether or not you make a profit in real terms (after inflation).

In both 2008 and 2011, inflation climbed to over 5% – not good news for savers. So always account for inflation. You could use the ‘Rule of 72’ to determine, at a given inflation rate, how long it will take for your money to buy half of what it can buy today. The ‘Rule of 72’ is a method used in finance to quickly estimate the doubling or halving time through compound interest or inflation respectively. Simply divide 72 by the given interest rate, or inflation rate, to find the number of years in which you would double or halve your money.

Risk protection plays a vital role

It’s best to discuss your goals with those you’re closest to and make plans together so that you are well aligned. An evaluation of your assets, liabilities, incomings and outgoings will provide you with a starting point. You’ll be able to see clearly how you’re doing and may find areas you can improve on.
Risk protection plays a vital role in any financial plan as it helps protect you and your family from unexpected events.

Check you’re using all of your tax allowances

With tax rules subject to constant change, it’s essential that you regularly review your own and your family’s tax affairs and plan accordingly. Tax planning affects all facets of your financial affairs. You may be worried about the impact that rises in property values are having on gifts or Inheritance Tax, how best to dispose of shares in a business, or the most efficient way to pass on your estate.

Utilising your tax allowances and reliefs is an effective way of reducing your tax liability and making considerable savings over a lifetime. When it comes to taxes, there’s one certainty – you’ll pay more tax than you need to unless you plan. The UK tax system is complex, and its legislation often changes. So it’s more important than ever to be tax-efficient, particularly if you are in the top tax bracket, making sure you don’t pay any more tax than necessary.

Creating your comprehensive financial plan

Creating and implementing a comprehensive financial plan will help you develop a clear picture of your current financial situation by reviewing your income, assets and liabilities. Other elements to consider will typically include putting in place a Will to protect your family, thinking about how your family will manage without your income should you fall ill or die prematurely, or creating a more efficient tax strategy.

Identifying your retirement freedom options

Retirement is a time that many look forward to, where your hard-earned money should support you as you transition to the next stage of life. The number of options available at retirement has increased with changes to legislation, which have brought about pension freedoms over the years. The decisions you make regarding how you take your benefits may include tax-free cash, buying an annuity, drawing an income from your savings rather than pension fund, or a combination.

Beginning your retirement planning early gives you the best chance of making sure you have adequate funds to support your lifestyle. You may have several pension pots with different employers, as well as your own savings to withdraw from.

Monitoring and reviewing your financial plan

There is little point in setting goals and never returning to them. You should expect to make alterations as life changes. Set a formal yearly review at the very least to check you are on track to meeting your goals.

We will help you to monitor your plan, making adjustments as your goals, time frames or circumstances change. Discussing your goals with us will be highly beneficial, as we can provide an objective third-party view, as well as the expertise to help advise you with financial planning issues.

ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS TESTED BENEFITS AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

CRITICAL ILLNESS PLANS MAY NOT COVER ALL THE DEFINITIONS OF A CRITICAL ILLNESS. THE DEFINITIONS VARY BETWEEN PRODUCT PROVIDERS AND WILL BE DESCRIBED IN THE KEY FEATURES AND POLICY DOCUMENT IF YOU GO AHEAD WITH A PLAN.

THE PLAN WILL HAVE NO CASH IN VALUE AT ANY TIME AND WILL CEASE AT THE END OF THE TERM. IF PREMIUMS ARE NOT MAINTAINED, THEN COVER WILL LAPSE.

Time to explore your ISA options?

An Individual Savings Account (ISA) enables you to save in a simple, tax-efficient way, while generally giving you instant access to your money. This gives you short, medium and long-term saving options, and with the end of the current tax year not too far away, it’s important to make the most of your annual tax-free ISA allowance.

UK residents aged 16 or over can save up to £20,000 a year (for the 2019/20 tax year) into a Cash ISA. Those aged 18 or over can save in a Cash or Stocks & Shares ISA, or combination of ISAs.

Tax-efficient wrapper

ISAs are a very tax-efficient wrapper in which you can buy, hold and sell investments. For any ISA contributions to count for the current tax year, you must save or invest by 5 April.

Also, don’t forget that any unused ISA allowance can’t be rolled over into a subsequent tax year, so if you don’t use it, you’ve lost it forever. Even though you’ll receive a new allowance for the next tax year, you are not permitted to contribute anything towards a previous ISA.

Types of ISA options

• Cash ISAs – these are savings accounts that are tax-free, with the maximum allowable contribution set at £20,000 in the current tax year
• Junior ISAs – these are tax-free savings accounts in which under-18s can save or invest maximum contributions up to £4,368 in the current tax year
• Stocks & Shares ISAs – these are investments that are classed as tax-efficient, with the maximum allowable contribution set at £20,000 in the current tax year
• Innovative Finance ISAs – these are peer- to-peer lending investments that are classed as tax-efficient, with the maximum allowable contribution set at £20,000 in the current tax year. However, they are considered high risk, and it may not be possible to get your money out quickly. Some may not be protected by the Financial Services Compensation Scheme
• Lifetime ISAs – these can be either classed as savings (tax-free) or investments (tax-efficient). You must be aged between 18 to 39, and the maximum allowable contribution is set at £4,000 in the current tax year
• Help to Buy: ISAs – these were set up to help those saving for their first home and were only available to new savers until 30 November 2019. Existing savers can continue saving, although they must claim their government bonus by 1 December 2030.

Key elements

Goals, time horizon, risk and diversification are key elements to consider when saving and investing. You could put all the £20,000 into a Cash ISA, or invest it in a Stocks & Shares ISA or an Innovative Finance ISA. Alternatively, you could split your allowance between Cash ISAs, Stocks & Shares ISAs, Lifetime ISAs or Innovative Finance ISAs, depending on your specific situation and requirements.

If you are not sure what to invest in, you could temporarily hold your annual ISA allowance in cash in the short term and invest thereafter. However, cash is not good for the long term because inflation has the potential to erode its value.

Transfer investments

If you don’t have £20,000 in new money to invest, you could transfer investments outside a tax-efficient wrapper into an ISA.
ISAs can also be passed on death to a surviving spouse or registered civil partner. The surviving spouse is entitled to an additional, one-off ISA allowance, equal to the value of the deceased’s ISA holdings. This enables the surviving spouse to effectively re-shelter assets which were in a spouse’s ISA into an ISA in their own name.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE TAX BENEFITS RELATING TO ISA INVESTMENTS MAY NOT BE MAINTAINED.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Preserving your wealth and transferring it effectively

Estate planning is an important part of wealth management, no matter how much wealth you have built up. It’s the process of making a plan for how your assets will be distributed upon your death or incapacitation.

As a nation, we are reluctant to talk about inheritance. Through estate planning, however, you can ensure your assets are given to the people and organisations you care about, and you can also take steps to minimise the impact of taxes and other costs on your estate.

In order to establish the value of your estate, it is first necessary to calculate the total worth of all your assets. No matter how large or how modest, your estate is comprised of everything you own, including your home, cars, other properties, savings and investments, life insurance (if not written in an appropriate trust), furniture, jewellery, works of art, and any other personal possessions.

Having an effective estate plan in place will not only help to ensure that those you care about the most will be taken care of when you’re no longer around, but it can also help minimise Inheritance Tax (IHT) liabilities and ensure that assets are transferred in an orderly manner.

Write a Will

The reason to make a Will is to control how your estate is divided – but it isn’t just about money. Your Will is also the document in which you appoint guardians to look after your children or your dependents. Almost half (44%) of over-55s have not made a Will[1], and as such, they will not have any say in what happens to their assets when they die.

Should you die without a valid Will, you will have died intestate. In these cases, your assets are distributed according to the Intestacy Rules in a set order laid down by law. This order may not reflect your wishes.

Even for those who are married or in a registered civil partnership, dying without leaving a Will may mean that your spouse or registered civil partner does not inherit the whole of your estate. Remember: life and circumstances change over time, and your Will should reflect those changes – so keep it updated.

Make a Lasting Power of Attorney

Increasingly, more people in the UK are using legal instruments that ensure their affairs are looked after when they become incapable of looking after their finances or making decisions about their health and welfare.

By arranging a Lasting Power of Attorney, you are officially naming someone to have the power to take care of your property, your financial affairs, and your health and welfare if you suffer an incapacitating illness or injury.

Plan for Inheritance Tax

IHT is calculated based on the value of the property, money and possessions of someone who has died if the total value of their assets exceeds £325,000, or £650,000 if they’re married or widowed. If you plan ahead, it is usually possible to pass on more of your wealth to your chosen beneficiaries and to pay less IHT.

Since April 2017, an additional main residence nil-rate band allowance was phased in. It is currently worth £150,000, but it will rise to £175,000 per person by April this year. However, not everyone will be able to benefit from the new allowance, as you can only use it if you are passing your home to your children, grandchildren or any other lineal descendant. If you don’t have any direct descendants, you won’t qualify for the allowance.

The headline rate of IHT is 40%, though there are various exemptions, allowances and reliefs that mean that the effective rate paid on estates is usually lower. Those leaving some of their estate to registered charities can qualify for a reduced headline rate of 36% on the part of the estate they leave to family and friends.

Gift assets while you’re alive

One thing that’s important to remember when developing an estate plan is that the process isn’t just about passing on your assets when you die. It’s also about analysing your finances now and potentially making the most of your assets while you are still alive. By gifting assets to younger generations while you’re still around, you could enjoy seeing the assets put to good use, while simultaneously reducing your IHT bill.

Make use of gift allowances

One way to pass on wealth tax-efficiently is to take advantage of gift allowances that are in place. Every person is allowed to make an IHT-free gift of up to £3,000 in any tax year, and this allowance can be carried forward one year if you don’t use up all your allowance.

This means you and your partner could gift your children or grandchildren £6,000 this year (or £12,000 if your previous year’s allowances weren’t used up) and that gift won’t incur IHT. You can continue to make this gift annually.

You are able to make small gifts of up to £250 per year to anyone you like. There is no limit to the number of recipients in one tax year, and these small gifts will also be IHT-free provided you have made no other gifts to that person during the tax year.

A Potentially Exempt Transfer (PET) enables you to make gifts of unlimited value which will become exempt from Inheritance Tax if you survive for a period of seven years.
Gifts that are made out of surplus income can also be free of IHT, as long as detailed records are maintained.

IHT-exempt assets

There are a number of specialist asset classes that are exempt to IHT. Several of these exemptions stem from government efforts over the years to protect farms and businesses from large Inheritance Tax bills that could result in assets having to be sold off when they were passed down to the next generation.

Business relief (BR) acts to protect business owners from IHT on their business assets. It extends to include the ownership of shares in any unlisted company. It also offers partial relief for those who own majority rights in listed companies, land, buildings or business machinery, or have such assets held in a trust.

Life insurance within a trust

A life insurance policy in trust is a legal arrangement that keeps a life insurance pay-out separate from the valuation of your estate after you die. By ring-fencing the proceeds from a life insurance policy by putting it in an appropriate trust, you could protect it from IHT.

The proceeds of a trust are typically overseen by a trustee(s) whom you appoint. These proceeds go to the people you’ve chosen, known as your ‘beneficiaries’. It’s the responsibility of the trustee(s) to make sure the money you’ve set aside goes to whom you want it to after you pass away.

Keep wealth within a pension

When you die, your pension funds may be inherited by your loved ones. But who inherits, and how much, is governed by complex rules. Money left in your pensions can be passed on to anyone you choose more tax-efficiently than ever, depending on the type of pension you have, by you nominating to whom you would like to leave your pension savings (your Will won’t do this for you) and your age when you die, before or after the age of 75.

Your pension is normally free of IHT, unlike many other investments. It is not part of your taxable estate. Keeping your pension wealth within your pension fund and passing it down to future generations can be very tax-efficient estate planning.

It combines IHT-free investment returns and potentially, for some beneficiaries, tax-free withdrawals. Remember that any money you take out of your pension becomes part of your estate and could be subject to IHT. This includes any of your tax-free cash allowance which you might not have spent. Also, older style pensions may be inside your estate for IHT.

Source data:
[1] Brewin Dolphin research: Opinium surveyed 5,000 UK adults online between 30 August and 5 September 2018.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS.

ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE RULES AROUND TRUSTS ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

THE VALUE OF INVESTMENTS AND THE INCOME THEY PRODUCE CAN FALL AS WELL AS RISE. YOU MAY GET BACK LESS THAN YOU INVESTED.

Putting money to work earlier allows more time for savings to grow

Millennials are more bullish than any other generation about their retirement savings, a major new study has found[1]. But with time on their side, should they be doing more?

Almost two fifths (38%) of millennial investors (aged between 18 and 37) globally are very confident they are saving enough now so they won’t run out of money in their retirement. That is more than 29% for Generation X (aged between 38 and 50) and 21% for Baby Boomers (aged between 51 and 70).

Bucking a common myth

Millennials say they are saving on average 15.9% (including employer contributions) of their income (wages plus any other earnings) specifically for their retirement. That too is more than Gen Xers (14.7%) and Baby Boomers (13.7%).

The results of the study appear to buck a common myth that millennials aren’t doing enough to save for their retirement. On the contrary, millennials appear to be saving a reasonable amount for their retirement, which is encouraging.

Miracle of compounding

The one thing that millennials have on their side over older generations is time, with up to 40 years or more until they are due to retire. Putting their money to work earlier allows more time for their savings to grow. It could also mean less of a scramble in the latter part of their careers if they have to make up shortfalls.

By starting early, millennials benefit more from the miracle of compounding – or, as Einstein called it, ‘the eighth wonder of the world’. Compounding involves earning a return not only on your original savings but also on the accumulated interest, or returns, earned on your past savings. That is why total contributions should be less the earlier you start saving, because you can earn returns on returns over a longer period.

Factors to consider

There are, of course, other factors to consider. Returns are by no means guaranteed, and careers can fluctuate too. Still, millennials are doing more than most when it comes to saving for retirement.

GIS 2019 found that millennials are saving more than the average non-retired investor aged 38 and above in most (20 out of 32) of the locations in which they live. Belgium (+9.0%), Austria (+8.5%) and Portugal (+5.3%) were the three locations where the disparity was highest between what millennials and non-millennials were saving, on average.

Source data:
[1] Schroders Global Investor Study (GIS) 2019, gathered from views of more than 25,000 investors in 32 locations around the world.