Protecting family wealth

Start planning your legacy to mitigate or reduce Inheritance Tax.

If you’ve worked hard throughout your lifetime to grow your wealth, and hope it will help to safeguard the financial security of your loved ones after you’ve gone. But without careful planning in your lifetime, you could leave them with less than expected after the Inheritance Tax bill is paid.

Proper planning can help you pass on as much as possible to the people you choose by avoiding additional unnecessary tax charges. But there is a perception by some people that Inheritance Tax only affects the rich, which is untrue.

Current and future needs of your loved ones

When you’re getting on with life, it’s not easy to stop and think about what will happen to your estate (such as your property, possessions, investments and cash) when you’re no longer around. Thats why it’s important to make sure that any assets you’ve built up over your lifetime aren’t subject to Inheritance Tax unnecessarily after your death, and that your loved ones, and any organisations close to your heart, benefit from your estate as you intended.

By reviewing your wealth and obtaining professional financial advice, you will be able to consider the current and future needs of your loved ones and how you can benefit them whilst preserving your assets.

Inheritance Tax facts

Every individual has an Inheritance Tax ‘Nil-Rate Band’ of £325,000 in the current 2021/22 tax year (the UK tax year starts on the 6th April each year and ends on the 5th April the following year). This means that you can pass on up to £325,000 worth of property, money, and other assets with no Inheritance Tax to pay.

Above this threshold, Inheritance Tax is normally levied at 40%. So, as a simple example, if you were to pass on wealth of £425,000, the first £325,000 would be tax-free, and the remaining £100,000 would be taxed at 40%, creating a tax liability of £40,000 for the recipient.

However, there are many tax reliefs and rules that can minimise the amount of Inheritance Tax due. You can leave your entire estate to a surviving spouse or registered civil partner with no Inheritance Tax due. But there are many other, lesser-known rules and reliefs that can also apply.
The current Inheritance Tax Nil-Rate Bands will remain at existing levels until April 2026.

How Inheritance Tax planning works

Inheritance Tax planning is a way of arranging your wealth with the various tax reliefs in mind so that your loved ones don’t pay more tax than they legally need to.

It works best when the process is started many years in advance. Certain transfers of capital may only become free from Inheritance Tax if you survive for seven years after they are made, so Inheritance Tax planning cannot be rushed.

Of course, Inheritance Tax is not the only consideration when it comes to arranging your finances – you also need to ensure that your wealth works for you in your lifetime. So, this planning must work in harmony with other areas of financial planning. It’s a precise and personal process.

Three steps to mitigate or reduce Inheritance Tax

The rules and reliefs that are most beneficial to you depend on your personal and financial situation. The advice you receive will be different on whether you’re single or married, if you have children or grandchildren, if you own your own business, and based on many other factors.
That said, here are three tips that many people could benefit from.

1. The Residence Nil-Rate Band (RNRB)

As well as the Inheritance Tax Nil-Rate Band mentioned earlier, there is an additional Nil-Rate Band that applies when passing on a property that was your main residence in your lifetime. This is an additional Inheritance Tax-free allowance for ‘qualifying’ home owners with estates worth less than £2.35 million that can result in you being able to pass on up to £500,000 when you die before Inheritance Tax has to be paid.

If you leave this property to a direct descendant (a child, adopted child, stepchild, foster child, grandchild or great-grandchild), you’ll qualify for the Residence Nil-Rate Band, which is currently £175,000. So, by using both Nil-Rate Bands, the total tax-free portion of your estate will be £500,000.
If you are a surviving spouse who inherited the total estate of your deceased partner, you also inherit their Nil-Rate Bands. So, in this scenario, you would be able to pass on up to £1,000,000 free of Inheritance Tax (including £350,000 of property using the RNRB and a further £650,000 of your combined estate).

2. Lifetime gifts

One way to minimise your Inheritance Tax bill is by gifting money or assets during your lifetime rather than waiting to pass on your wealth until after your death. However, in some situations, a gift can create an Inheritance Tax liability.

To be sure that yours doesn’t, follow these rules:

Small gifts (up to £250) to different individuals are typically free from Inheritance Tax. This rule is intended to cover any birthday gifts, Christmas gifts, etc.

Larger gifts are free from Inheritance Tax up to a total of £3,000 in each tax year. If you don’t use your total allowance in one tax year, you can carry it forward to the next year.

Wedding (or registered civil partnership) gifts are free from Inheritance Tax up to a certain value, which depends on your relationship to the recipient. If you are their parent, the limit is £5,000. If you are a grandparent or great-grandparent, the limit is £2,500. In any other case, the limit is £1,000.

3. A Deed of Variation

In some cases, you might have carefully arranged your wealth for Inheritance Tax purposes, but you then inherit money or other assets in someone’s Will that would result in your estate exceeding your available Nil-Rate Bands.

Rather than accepting this inheritance (which you may not need and would likely leave to a loved one later), you could apply for a Deed of Variation so that it is passed directly to that loved one immediately. It will not be counted as part of your estate.

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 INHERITANCE TAX 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.

Retirement planning journey

What you need to consider at every life stage.

When you’re starting out working in your 20s, you may not be thinking about retirement in 40 years. The same goes for your 30s, 40s and even 50s. There is always something on the horizon you could be saving for besides your retirement.

No matter how old you are, it’s always a good time to review your pension savings and update your retirement plan. Understanding your retirement goals during each decade is key to making sure you are able to enjoy and live the lifestyle you want and work hard for when you eventually decide to stop working.

Starting to save in your 20s

Though you’re decades away from retirement, your twenties are an important time for pension planning. That’s because the investments you make in these early years will benefit the most from compounding returns, and so have the most growth potential.

When you start work, if applicable to your situation, you’ll be automatically enrolled into your employer’s defined benefit (DB) workplace pension scheme and they will start to make contributions on your behalf.

A defined benefit workplace pension scheme pension scheme is one where the amount you’re paid is based on how many years you’ve worked for your employer and the salary you’ve earned. You should definitely not opt out of this – even if you feel you could do with the money now.

Staying on track in your 30s
By your thirties, you may have additional financial responsibilities, such as children and a mortgage. These can make it difficult to dedicate as much money and attention to your pension as you’d would like.

One way to stay on track is to review your pension contributions at least once a year and make sure you’re increasing them as your income grows. Another consideration is to check your investment strategy. With decades remaining before you’ll access your pension, you might choose to take a higher-risk approach now, and then gradually move into lower-risk investments as retirement grows closer.

Accumulating in your 40s

If your salary follows a typical trajectory, it is likely to start peaking when you’re in your 40s, making this decade a crucial time for pension accumulation. You should, by now, also have a good understanding of the income required to support your desired lifestyle, which will help you plan your retirement income. Based on this, you’ll know if you need to adjust your pension contributions to save enough.

At this life stage, you might have changed employers several times, so it might be sensible to check that you have all of the details for any old pensions and, if not, look to track them down.

Maximising your contributions in your 50s

If your pension contributions have fallen behind in any of the previous decades, it’s crucial to catch up now. As well as your salary sacrifice contributions, you might consider adding lump sums to your pension to help you reach your retirement goal.

If you plan to do this, make sure that you’ve checked what your annual allowance for this tax year is, and how much unused annual allowance you have from the last three years. This will determine how much extra you can contribute. For the tax year 2021/22 the annual limit is 100% of your salary or £40,000 (whichever is lower). This includes both contributions paid by you and contributions paid by your employer.

Alternatively, if you’ve stayed on track with all your pension contributions and your savings are at a very healthy level, you might need to take steps to manage your Lifetime Allowance. Currently, the maximum you can withdraw from your pensions in your lifetime is £1,073,100, so if you’re anywhere near that number you should seek professional financial advice.

Preparing to retire in your 60s

In the decade before retirement, some people may choose to take a lower-risk investment strategy with their pension savings than in previous years. While this may limit the potential growth of your investments, it can also reduce fluctuations in value, which can help you to plan your retirement income with more confidence.

You’ll also need to weigh up your options for accessing your pension. You might want to take a lump sum or several lump sums, or you might want to take a regular income. There are advantages and disadvantages to each approach, and decisions you make now will affect your income throughout your retirement.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE 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. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

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.

Live The Life You Want

How much pension income will you need for a comfortable retirement?

The purpose of a pension is to provide an income for you to live the life you want once you have retired. But, due to longer life expectancies, less generous schemes and lack of understanding around saving, a common problem is that some people don’t retire with enough to last them.

The current life expectancy in the United Kingdom[1] in 2017 to 2019 was 79.4 years for males and 83.1 years for females, while you can access your pension savings from the age of 55, and the State Pension age is currently 66.

Changes to your lifestyle

The concept of retirement has changed. The idea that we stop working at 65 and then spend our time playing golf and travelling the world is now anachronistic and probably ageist. However, retirement is a challenging new phase in life.

While it ranks high on the scale of stressful life events, it also provides the opportunity to enjoy a new lease of life. A fulfilling and enjoyable retirement will, of course, depend on the age you choose to retire at, your retirement plans and factors that impact your life expectancy, such as your health.

Retirees are falling short by decades

A recent survey of people aged 55 to 64 who have not yet retired found that 25% of this age group are only budgeting for their pension savings to last ten years. Around 10% are only budgeting for their pension savings to last five years[2].

All of these people are risking a significant gap with eventually no income from their retirement savings. While they may be eligible for the State Pension, that will provide less than £10,000 a year to live on.

Income needs tend to change

Perhaps these people have created their budget believing that less than £10,000 a year is likely to cover their needs in later life. They may feel that the first five to ten years are when their spending will be highest, so plan to use their retirement savings during that time.

But this isn’t a typical pattern for retirement spending. Often, there is a peak in spending in the first five to ten years, when many people pay off their mortgage or make a big purchase, such as a trip-of-a-lifetime. But there is another peak towards the end of life, when many people may need residential or at-home care, which can be expensive.

Retirement spending forecast

Surprisingly, 80% of survey respondents said they had received no advice on their retirement needs, and more than half of these people had no plans to. Receiving professional financial advice will help you identify and forecast how your retirement spending could change over time, make a realistic budget and determine how many years your current savings may last.

If there is a shortfall, you’ll then be able to make the necessary adjustments to ensure you top up any potential savings shortfall before you retire and see how many more years you may need to work for. You can also get a better understanding of where your pension is invested and your options to take an income from it. These factors might affect the income you’ll eventually receive, and what you can do about it.

Make sure your plans stay on track

If you’re not sure if you’ve saved enough to last throughout your retirement, a simple solution is to seek professional financial advice and get the answers you need. Get in touch today to find out how we can help you.

Source data:
[1] https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/bulletins/nationallifetablesunitedkingdom/2017to2019#main-points
[2] https://corporate-adviser.com/quarter-of-retirees-risk-exhausting-pension-funds/

Steps Towards A Better Financial Future

Grow, protect and transfer your wealth.

Financial planning is a step-by-step approach to ensure you meet your life goals. Your financial plan should act as a guide as you move through life’s journey. Essentially, it should help you remain in control of your income, expenses and investments so you can manage your money and achieve your goals.

Life rarely stands still. Priorities shift, circumstances change, opportunities come and go and plans need to adapt. But regular discussion and reviews are the key to keeping on top of things. This means adapting your plans when things change, to keep you on course.

1. What are my financial goals?

Generally, people’s financial goals change as they progress through different life stages. Here are some themes which might help you consider your own goals:

In your twenties, you may want to focus on saving for large purchases, such as a car, wedding or your first home

In your thirties, you may be planning for your family, perhaps school fees or your children’s future

In your forties, your focus may move to retirement planning and growing your wealth

In your fifties, paying off your mortgage and feeling financially free is likely to be a priority

In your sixties, it is usually about making sure you have enough money to retire successfully

In your seventies, your attention may turn to inheritance planning and later-life care

Other plans may also include starting your own business, buying a second home or travelling the world. Of course, everyone is different, so you might have a goal in mind we haven’t mentioned.

2. Are my goals short, medium or long term?

You are likely to have a mixture of short-term (less than three years), medium-term (three to ten years) and long-term (more than ten years) goals. Moving to a larger property might be a short-term goal, while saving for your children’s university fees might be a medium-term goal and retirement planning a long-term goal (depending on your life stage).

You’ll need different strategies, and different saving and investment risk levels, for each of these goals.

3. How hard is my money currently working?

If your cash is currently in a savings deposit account, the interest rate you’ll likely be receiving is probably not going to be sufficient to keep your money growing as quickly as inflation is rising over the longer term. So your savings could eventually lose buying power in real terms over the years ahead.

If you want your money to grow faster, you might want to consider allocating a portion of your savings towards investments. This may involve more risk than a savings account, but the amount of risk involved will be dependent on you and what you are looking to achieve, so you decide. Obtaining professional advice will ensure you choose investments at a risk level that suits your preferences.

4. Have I paid off my debts?

It’s not always wise to start investing if you have debts that you need to pay off (excluding long-term debts like student loans and mortgages). That’s because overdrafts, credit cards and other short-term debts can charge you more in interest than you could expect to gain in investment returns. In most instances, it will benefit you more in the future to become debt-free before you start to grow your wealth.

5. Am I making the most of my tax-efficient allowances?

All UK taxpayers receive certain allowances to help with saving and investing. For example, you may already have an Individual Savings Account (ISA) and be taking advantage of your annual allowance. You also have a capital gains allowance, a dividends allowance and a pension annual allowance. All of these will help you to grow your wealth faster, if you know how to use them.

Tax allowances can be complex though, and they can change without much notice, so if you’re not careful you risk an unexpected tax charge. If in doubt, talk us to review your options.

6. What are my retirement plans?

A key factor in any financial plan is the date you plan to retire, as that typically marks a turning point from accumulation of wealth built up throughout your working life, to the reduction of wealth as you start to spend your savings and pass your assets on to loved ones. Ensuring that those two elements of your life are well balanced is an important part of the financial planning process.

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 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.

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email: info@iftwm.com

Month: July 2021