Estate planning and intergenerational wealth

The journey to retirement is a long one and it’s important to enjoy yourself once you get there. But it’s also important that you budget for the whole of your retirement and that means factoring in any money you intend to leave to the next generation.

Whether you plan to help a child onto the property ladder, or pay into a Junior ISA for your grandchildren, if you intend to leave a portion of your wealth to your loved ones it’s never too early to start thinking about how you will do it.

Managing your estate is a complex juggling act. You’ll want to ensure you can maintain your desired standard of living for the rest of your life whilst being sure not to leave too much in your estate, thereby leaving your loved ones with a large inheritance tax (IHT) bill.

It’s a complicated task but we’re here to help you. Here’s your guide to the three main ways you can pass your wealth on to the next generation.

1. Your pension

Pension legislation allows pension wealth to be passed down through the generations in some cases.

The best way to do this is not to take your pension at all, so if your retirement fund is formed partly from other savings and investments, consider taking your pension last.

If you die before age 75 and you haven’t yet taken pension benefits, your unused pot remains outside of your estate for IHT calculation purposes and you can pass 100% of it on to your chosen beneficiary.

Beneficiaries are selected via your provider rather than through your will and it’s worth noting that if your beneficiary keeps the inherited amount in a pension environment, it won’t form part of their estate either.

If you die after age 75, your beneficiary will pay tax on the amount they receive, but they will be able to decide what they draw and when, a one-off lump sum, for example, or inheriting your plan as their own pension pot.

The rules are different once you’ve taken money from your pension and will change depending on how you’ve chosen to access your money and the age at which you die. The money you’ve withdrawn from your pension but not spent will likely become part of your estate and be subject to IHT.

Be aware too that not all pensions, and pension options, are flexible. If you currently receive an annuity, for example, this will stop on death with no amount to pass on, unless it was set up to pay for longer, through a guarantee period or via a spouse’s pension.

2. Gifting

Although it’s only natural that you want to leave some money to the next generation, you might also need to ensure you don’t leave too much. This could impact on your ability to live the retirement lifestyle you choose, and it might also see your loved ones left with a large inheritance tax bill after you’re gone.

Managing liability for IHT can be a tricky balancing act so contact us if you’ like to discuss any aspect of your estate.

One way in which estate planning could help is through gifting. HMRC will allow you to give funds away, in certain circumstances, and doing so takes those amounts out of the value of your estate for IHT calculation purposes.

  • Exempted gifts

Gifts of up to £250 are usually exempt and these could include birthday or Christmas presents. Gifts made to your spouse, during your lifetime, are also usually exempt.

  • Annual Exemption

The annual exemption currently stands at £3,000 a year. This is the amount you can gift tax-free.

The annual exemption can be carried forward for one year and applies per individual. Couples can gift £6,000 a year, or up to £12,000 if neither of you used your Annual Exemption last year.

  • Normal expenditure out of income

You can also make exempted gifts using the normal expenditure out of income exemption.

You must prove to HMRC that the gifted amount forms part of your normal expenditure, that it was made out of income, and that making the gift doesn’t impact your ability to maintain your normal standard of living.

Use gifting during your lifetime to spread your wealth and help limit any IHT tax liability when you are no longer around.

3. Inheritance

The simplest way to leave money to your loved ones is to ensure you have a will in place.

A will allows you to make your wishes known, setting out what you want to happen to your money when you die, ensuring it goes to the right people. And yet over half of UK adults don’t have a will in place.

If you don’t currently have a will or it isn’t up to date, writing or revisiting your will now should be a priority.

Dying without a will means that your assets will be distributed according to the rules of intestacy. You and your loved ones will have no say over what happens to your estate and therefore you can’t be sure your wealth will be distributed in a way that corresponds to your wishes.

Write or review your will to make sure it is in line with your wishes and speak to us if you are unsure about any aspect of putting your will in place.

Get in touch

If you’d like to discuss any aspect of your estate or passing your wealth on to the next generation, please contact us.

Please note: The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.