Half of over-50s hope to leave a financial legacy for their loved ones, new data shows, while 11 percent are willing to sacrifice the quality of their own retirement to do so.
In a survey by life insurer SunLife, 27 percent said their children’s financial health was their biggest financial concern.
As a result, leaving a legacy for children and grandchildren is at the top of many people’s priority lists.
Future generations:
In fact, a third of retirees said they had already given a substantial amount of money, on average £15,978, to their loved ones as an ‘early inheritance’.
This is despite their own financial concerns: 73 percent of those over 50 say they worry about the rising cost of living, and 37 percent worry they could run out of money in retirement.
Mark Screeton, CEO of SunLife, said: ‘Our Life Well Spent report shows that over 50s are driven by family – 87 per cent name family as what makes them happiest.’
However, he added: ‘It can be difficult for the older generation to consider setting aside an inheritance without making major sacrifices in terms of their own financial well-being.’
This is Money looks at where to start when it comes to planning what you want to leave behind for your loved ones.
1. Write a will
Making a will is an essential step to ensure that your (financial) wishes are respected when you die.
Without a will, your entire estate can be left to your spouse, or divided among your children or grandchildren if you have no surviving spouse.
By recording your wishes in a will, your estate will be distributed as you wish.
“Be specific,” says Amy Nelson, head of private clients at Bakerlaw Solicitors. “Think about possible scenarios, such as what happens if a beneficiary dies before you.
‘Life circumstances change, so it is essential to review and update your will regularly. Marriages, divorces, births and deaths within the family may necessitate revisions to ensure your will reflects your current intentions.”
It’s never too early to put your wishes in writing as wills can be updated at any time. It is advisable to review your will at least every five years.
2. Draw up a power of attorney
It is also wise to draw up a power of attorney so that you are prepared for a scenario in which you cannot make the necessary decisions.
“These legal documents name those you trust to make financial or health care decisions on your behalf during your lifetime, either at your direction or if you are unable to do so,” Nelson says.
Nelson recommends that you choose people you can trust, who understand your needs and will carry out their responsibilities.
‘Discuss your preferences with your chosen lawyers and any replacement lawyers you appoint. Make sure they understand your values and priorities around medical care and financial matters,” says Nelson.
A power of attorney can be drawn up for your financial affairs as well as your health and well-being. In many cases it is advisable to have both types of powers of attorney.
When dealing with a power of attorney or your will, Nelson recommends that you seek legal advice in this regard to ensure accuracy and legality and to ensure that your wishes are legally binding.
3. Appreciate your possessions
When writing your will, it’s a good idea to make a list of the items you want included, and to have an idea of the rough value of your estate.
This ensures that you take into account all the money and property available to you, as well as what your loved ones may have to pay in taxes.
‘It is tempting to understate the value of valuables such as property to minimize tax, but HMRC investigations have increased significantly in recent years, with property undervaluation a key target,’ says Ian Dyall , head of estate planning at Evelyn. Partners said: This is money.
He says anyone planning their estate should get two independent appraisals to confirm the value of their property.
The final value is calculated based on the open market at the date of death, but a solid estimate when arranging your affairs can ensure that the tax bill is kept to a minimum.
When planning what to leave to your family, wherever possible, make the most of tax-free wrappers available in the form of gifts, trusts and private pensions, as these will not usually be included in your taxable estate.
4. Reduce inheritance taxes
Once you have an idea of what to give away, the next step is to ensure your loved ones get as much of it as possible by reducing their estate taxes over time.
“Mitigating estate taxes is a balancing act between saving taxes on the one hand and maintaining access to the money you need to ensure you stay financially secure on the other,” Dyall said.
“The starting point is to look for strategies that deliver tax savings with little or no loss of access. Ensuring that your will makes the best use of your nil rate range, the nil rate range of your place of residence and any nil rate ranges you may be able to claim from a deceased spouse would be an example of this,” he said.
Zero rate bands are the amount you can pass on to your loved ones without them having to pay inheritance tax.
Read our comprehensive inheritance tax guide for more information about these thresholds.
Money from personal pension schemes can also be passed on free of inheritance tax. Currently, beneficiaries pay no tax on inherited pensions up to the decedent’s lifetime benefit limit if the owner dies before age 75, or up to their regular income tax rate if they are 75 or older.
If you are able to do so, it may be wise to live off other assets you have so that you can preserve this tax-free inheritance for your loved ones.
Make the most of it: Dyall recommends using your tax-free gift amount to pass on money to your loved ones. This allows you to donate €3,000 tax-free annually
Donating also allows you to pass money on to your children while you’re still alive, and you’ll have a tax-free gift allowance of £3,000 each year, as well as unlimited small gifts of £250 to as many people as you like. If you live for seven years after the donation, the donation is exempt from inheritance tax.
Dyall said: ‘There is a limit to how far you can go without looking at ways to reduce liability that limit your access to existing assets, but many people are able to donate money or spend more money without compromising their financial to sacrifice security.
“Cash flow analysis of your future income stream and expected expenses can help determine how much you can afford to safely donate or spend.”
Investing in life insurance may also be something to consider. Life insurance payouts are tax-free, so your loved ones won’t have to pay income or capital gains taxes on the money they receive.
Life insurance may be included in your estate for estate tax purposes, but you can avoid this if you have a policy written ‘in trust’ for your beneficiaries.
There are pros and cons to this and it is worth seeking advice before doing so.
5. Should you use a trust?
According to SunLife, many who plan their inheritance have specific ideas in mind about where they want their money to go. A fifth have given money to help relatives buy a house, while 15 percent gave money for a wedding and 14 percent for a holiday.
If you have specific ideas about who in your family you want to give control of your money and what to spend it on, you may want to consider putting it in a trust.
Dyall said: ‘Trusts can be useful if you are concerned about having some control over how the money is used, or if you want to protect assets against divorce or bankruptcy of a beneficiary, but you can generally only save £325,000 at a time. put into a trust. donor within a period of seven years, otherwise 20 percent inheritance tax will be levied on the excess.
“Many people prefer to use trusts because then, as trustees, they can have some control over who benefits, when they benefit, how much they receive, how the money is invested, and so on.”
On the other hand, direct donations that go beyond your benefits can prove to be a useful option, as you will live to see how the money is used.
Of course, going beyond your gift tax means that your money may be subject to taxes.
6. Consider financial advice
It can be tempting to shoulder the burden of planning your estate yourself.
After all, your goal is to leave as much of your wealth as possible to your loved ones, so skimping on professional advice seems counterproductive.
Although the costs involved with financial advice may hold you back somewhat, it can prove more effective in the long run. This is especially true if you have a lot of money or assets to play with.
Professional advice can also give you as much or as little help as you need. For example, a financial advisor can simply help you find the private retirement product that best suits your needs.
On the other hand, you can hire a financial planner to get a complete picture of your finances and a step-by-step plan tailored to your position.
The other benefit is that it takes some of the pressure off of estate planning so you can make the most of your retirement.
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