Do you need inheritance for a comfortable retirement?

New research has found that over a third of British adults are relying on inheritance for financial comfort in the future – but 24% of retired people are planning to leave nothing for beneficiaries. Without such a windfall, though, 20% of people will struggle to retire comfortably and 25% will need to work longer than planned. Worryingly, some of these respondents are already retired.

As alarming as these figures are, they are not new; similar results were announced in 2009, with the Guardian writing that “Nearly one in three British adults is planning to fund their retirement with an inheritance that could easily fail to materialise”. The research, by Friends Provident, found that 31% of people expected inherited money and property to help them fund retirement – of those who admitted that inheritance would help to pay for their retirement, 36% thought it would fund over half of the required income.

Quite how accurate their predictions would be was up for debate though, as just 14% of adults have discussed the topic of inheritance with their families and had a clear idea of how much they could expect to receive. Further research by the Equity Release Solicitors’ Alliance found that half of people did not know the value of the estate, which highlights the importance of not basing retirement plans on it. It is easy to overestimate the value of an estate, so open conversations are beneficial if for no other reason than ensuring you are aware of the realities.

Hinging financial security in later life on a windfall is not exclusive to the UK; an article from earlier this year provided the results of a survey of 1,000 Americans, a fifth of whom were already retired. Of those yet to retire, almost a quarter “would ideally like to spend all of their savings and let their children fend for themselves”, compared to just 9% who want to save as much as they can in order to pass to beneficiaries.

What are the rules on inheritance?

Currently, each individual can pass on £325,000 to a beneficiary before paying inheritance tax, which is applied at 40% to any sum over that amount. However, couples can share their allowance, so the threshold increases to £650,000.

One of the announcements in July’s Emergency Budget was a change to the inheritance tax threshold. The chancellor George Osborne announced that when the estate includes a family home, the threshold increases to £1 million. This is comprised of the existing £650,000 for couples plus an additional £175,000 per person for the home. Although this is a welcome move for anyone who now escapes an inheritance tax bill, it does add some confusion because there are multiple rates. They are, however, quite straightforward:

  • £325,000 – each person can pass this amount on without paying inheritance tax; this doubles to £650,000 for spouses and civil partners
  • £175,000 – the new individual allowance for a family home left to immediate family, taking effect in 2020; this doubles to £350,000 for spouses and civil partners.
  • £1 million – adding the above allowances for couples provides a total threshold of a million pounds. For a single person, it is £500,000.

If you are hoping to leave or receive money in an estate, it’s important to have a will. A person dying without having a will is known as dying intestate, and this can be very complicated, with unmarried partners possibly receiving nothing. The rules change depending on how much money is in the estate, and the government receives it if there are no surviving relatives. A simple will, however, can avoid all the complexity and frustration as it is a legal document explaining what a person wants to do with their money – which could be leaving it all to charity.

Relying on inheritance

Although some will be fortunate enough to inherit enough money to make a difference to their finances, whether that’s clearing the mortgage or supporting retirement, it should be treated as a bonus rather than Plan A. After all, there’s no way of knowing when the inheritance will be coming, nor how much it will be. People are living longer, which not only delays a person being a beneficiary but can also reduce the amount of money they may receive, especially if care fees are being paid or an equity release loan needs to be paid back. It’s also worth considering that it can take a long time to receive the money from an inheritance, especially when it involves selling a property.

Saving for the future is exceptionally important. There are various ways of doing so – ISAs can hold cash as well as stocks and shares, or cash can be kept in savings and current accounts and receive interest. A direct debit of a percentage of your earnings into these accounts can automate the process, making it simple to do. For long-term saving, pensions are hard to beat because they receive free money: tax relief is applied on contributions, giving an immediate boost to the fund value, and you could receive employer contributions in a workplace pension. From the age of 55, it’s possible to remove up to 25% of private or company pensions as tax-free cash.

If you already have a pension, it’s important to check its performance to make sure it is performing as expected and that you are not losing out to high fees. Failing to do this can cause a serious reduction in the amount of money you are able to retire with, but doing so and making adjustments can significantly boost your later life income.

How are you planning for retirement? Let us know with a comment below.

Call 0800 304 7288 for a friendly chat about your pension

Important information

Tax treatment depends on your individual circumstances and may be subject to change in future.

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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