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Typically, people start thinking about their pension years before they consider their inheritance tax (IHT) plan. Whilst this is better than neglecting both entirely, planning ahead and integrating the two can result in significant savings for you as an individual – as well as a more meaningful legacy for your loved ones when you are gone.
In this article, our financial planning team at Cedar House outlines the relationship between a pension plan and IHT, suggesting how they can be linked to save on tax and keep more wealth within the family. We hope you find this content useful. If you’d like to find out more or discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or firstname.lastname@example.org
Why retirement planning & IHT are linked
We all hear exhortations from parents, colleagues and society to save towards our retirement – and it is important to do so. Yet building up wealth to sustain our lifestyles in “life after work” also carries the risk that this wealth will be taxed – not only throughout retirement through income taxes but also upon death via IHT.
To illustrate this, consider the Lifetime Allowance; the total “cap” on how much you can save into your pension(s). tax-free. In 2021-22 this is set at £1,073,100. If you exceed this and take any benefits as a lump sum, these will be taxed at 55% (or 25% if taken as income). Since pension pots are not subject to IHT, this can lead some people to make large pension contributions to support a comfortable retirement lifestyle and, later, also pass more wealth to their children (via their pension) free from IHT. However, without careful planning this can lead some people to contribute so much that they inadvertently end up exceeding the Lifetime Allowance, resulting in a punitive tax bill. One option to try and side-step this is to save/invest into other tax-efficient vehicles such as your ISA, to help provide a retirement income. However, cash and investments inside your ISA(s) are not exempt from IHT when you die – thus potentially reducing how much you may otherwise have wanted to pass onto your loved ones.
This starts to show the complicated relationship between pension planning and estate (or IHT) planning. Decisions taken about one impact the other, which is why it is typically inefficient to lay a pension plan in your 40s/50s and only turn to your IHT plan decades later. Dealing with them together with the help of a financial planner can help you make much wiser decisions about the two which enable both to work together towards a united set of financial goals.
How integrate the two
The first steps involved with creating a united pension and IHT plan involve establishing your values and goals. In other words, is it important to you to pass on as much wealth as possible to your children in the future? Or, do you believe that they should work from a fresh slate and take responsibility for building their own wealth? These start to address your values for IHT planning, but you also need to do this for your pension. How much do you need to retire comfortably, and are you on track to achieve this? When you eventually retire, will you see the retirement wealth you have built primarily as your own (to enjoy) or as “family wealth” that your children have an inherent right to?
These are deep, complex questions which are also highly personal. Yet the answers will play an important role in the strategy you decide upon for your pension and estate. One challenge you may also need to factor into all of this is that your values and goals may evolve in the future as you age and your circumstances change. Presently, you may be single and not have children, for instance, which may lead you to want to give more of your future estate away to charity. Yet if there is a possibility that this could change, bear in mind that it may lead you to want to keep more wealth within the family after you die.
As such, whilst it helps to plan far ahead with your pension and estate plan, it can be wise to have some built-in flexibility to account for possible changes in your future goals. Even if your goals and values remain unchanged in the years and decades ahead, however, bear in mind that the regulatory and tax landscape may not. Here, it can give you more room to maneuver if you have built up multiple assets and income streams for retirement, so your financial position is not disproportionately impacted by any government policy or legislative changes in any area. A financial planner can assist here. Whilst they cannot predict the future, they can help you take a clearer assessment of the current rules and financial landscape – creating a plan that helps you get the best out of present conditions whilst allowing scope to change tactics later if necessary.
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or email@example.com