BIf you want to have control over what happens to your assets after your death, effective estate planning is essential. After a lifetime of hard work, you want to make sure you protect as much of your wealth as possible and pass it on to the right people. However, this does not happen automatically. If you do not plan for what happens to your assets when you die, more of your estate than necessary could be subject to inheritance tax.
The rules around Inheritance Tax changed from 6 April this year. The introduction of
an additional nil-rate band is good news for married couples looking to pass the family
home down to their children or grandchildren, but not every estate can claim it.
This tax year, according to the Office for Budget Responsibility, more than 30,000 bereaved families will be required to pay tax on their inheritance. So, it pays to think about
Inheritance Tax while you can and work out as soon as possible how much potentially could be
taken out of your estate – before it becomes your family’s problem to deal with.
An Inheritance Tax survey conducted by Canada Life shows that Britons over the age of 45 are either ignoring estate planning solutions or they have forgotten about the benefits these can provide. Only 27% of those surveyed have taken financial advice on Inheritance Tax planning, despite all of them having a potential Inheritance Tax liability.
Leaving An Estate
Every individual in the UK, regardless of marital status, is entitled to leave an estate worth up to
£325,000 without having to pay any Inheritance Tax. This is known as the ‘nil-rate band’.
Anything above that amount is taxed at an Inheritance Tax rate of 40%. If you are married
or in a registered civil partnership, then you can leave your entire estate to your spouse or
partner with no Inheritance Tax liability.
The estate will be exempt from Inheritance Tax and will not use up the nil-rate band.
Instead, the unused nil-rate band is transferred to your spouse or registered civil
partner on their death. This means that should you and your spouse pass away, the value
of your combined estate has to be valued at more than £650,000 before the estate would
face an Inheritance Tax liability.
You don’t have to own a very large estate or even be considered ‘wealthy’ to leave behind
an Inheritance Tax bill. The nil-rate band has remained frozen at £325,000 since April
2009, but the average price of a UK property has risen 33% over the same period.
With much of the UK population’s wealth invested in their property, a growing number
of families are potentially being left with a significant Inheritance Tax bill to pay.
Residence Nil-Rate Band
If you’re worried that rising house prices might have pushed the value of your estate
into exceeding the nil-rate band, then the new ‘residence nil-rate band’ could be
significant. From 6 April 2017, it can now be claimed on top of the existing nil-rate band.
But claiming this new allowance is not as simple as it sounds. It can only be claimed by
the estates of people on property that is, or was at some point in the past, used as their
main residence and which forms part of their estate on death.
It’s only available to homeowners who plan on leaving their residence to ‘direct descendants’, such as children or grandchildren or step children. If you don’t have any direct descendants, or you wish to leave your home to someone else, the new allowance can’t be claimed.
Anyone without a property worth at least £175,000 per person, or £350,000 per couple
(in 2020/21), will only partially benefit. And, because the new allowance was intended to
help ‘middle England’ and those who weren’t especially wealthy, the residence nil-rate
band reduces for estates worth more than £2 million by £1 for every £2 above the
taper threshold. Because of this tapering effect, there is a point at which claiming the
allowance is ruled out completely.
Your estate may still be able to claim the residence nil-rate allowance even if you’ve
already sold your home, for example, because you are in residential care or living
with your children. If your home was sold after 8 July 2015 and you plan on leaving
the proceeds to your direct descendants, then there are provisions in place that
will allow your estate to claim the new allowance. However, this doesn’t apply to
homes sold before 9 July 2015.
If you plan ahead, certain gifts made during your lifetime could reduce the amount of
Inheritance Tax payable on your death. In addition, the proceeds payable from
any life insurance policies written in an appropriate trust will not form part of
your estate and so will not further add to a potential Inheritance Tax bill.
Estate planning will enable you to maximise your wealth and minimise Inheritance Tax. Is it
time for you to have a comprehensive review of all your assets and objectives and consider
the tax-efficient solutions?
What Are Your Requirements And Motivations?
The rules around Inheritance Tax are complex, and when reviewing your
particular situation you should always obtain professional advice. Everyone has
different requirements and motivations – the right solutions for you are the ones
that suit your personal circumstances. We can work with you to discover what these
are. To discuss all the options available to you, please contact us.
The 2015 pension freedoms gave us greater flexibility over our retirement options, but the reforms have also made retirement choices much more complex. This means we need to start thinking abut our retirement earlier. However, half (50%) of respondents aged 45-54 to a LV= Consumer survey  didn't think about retirement at all last year.
Given the lack of time people spend thinking about retirement, it’s perhaps unsurprising
that six in ten (62%) 45 to 54-year-olds don’t know how much they have saved for
retirement, and only around one in ten (12%) say they fully understand the 2015 pension reforms.
If people spent more time planning for retirement, this could help them better identify
whether they are saving enough. According to the survey, people expect to need £1,360 a month in order to live comfortably in retirement. In order to do this, someone retiring at 55 would need to have around £311,000 saved, or £158,000 if they retire at 65 – assuming they qualify for the full State Pension.
However, the average pension savings of those surveyed aged 45 to 54 years old is
£71,342, with four in ten (39%) having less than £50,000, and one in seven (13%) not having
anything at all. To achieve the amount they want and retire at 55, the average 45-year-old
would need to save around £24,000 in pension contributions each year for the next decade.
Anyone approaching retirement should check their pension pots annually and seek professional
financial advice to help them make a plan.
Five areas to consider if appropriate to your retirement plans:
1. Track down lost pensions – If you’ve moved jobs frequently, you may have lost track of
old pensions. The Pension Tracing Service is free and can help you trace a pension that
you’ve lost track of, even if you don’t have the contact details of the provider. All you need to
know is the name of your previous employer or pension scheme.
2. Consider consolidating – It’s easy to build up a number of different pensions over the course
of a lifetime, and by consolidating them into one place you could save money and manage
your savings more effectively. This process lets you simplify your pension arrangements and
makes it easier to manage your pension savings efficiently from a single pot.
3. Check your other assets – Compile a list of any other savings or investments that you have which could help fund your retirement. This could include equity in property.
4. Review the State Pension – It’s unlikely to be enough to see you through retirement
on its own, but it should be taken into consideration when looking at your options.
You can check your State Pension age by using the Government’s state pension calculator –
5. Obtain professional financial advice – Regulated professional financial advice is the
best way to help you plan and save enough money to last throughout retirement.
 Consumer survey: Opinium, on behalf of LV=, conducted online interviews with 2,404 UK adults between 12 and 27 March 2017. Data has been weighted to reflect a nationally representative audience.
 Methodology for retirement income: LV= calculated the size of pension pot needed to give someone in good health a monthly income of £1,361 (or annual income of £16,332) from the age of 55 until death and 65 until death, including the full State Pension.
To provide a guaranteed income between 55 and 65, LV= calculated the pot size needed to purchase a Fixed Term Annuity with no money left at the end of the term. To provide an income after 65, once the State Pension kicks in, three comparison annuity quotes were produced with major providers for someone retiring at 65, and an average figure was taken for each. All quotes are gender neutral and assume a single life annuity with no death benefits.
Accessing pension benefits early may impact on levels of retirement income and is not suitable for everyone. You should seek advice to understand your options at retirement.
Your pension income could also be affected by 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.
Prime minister Theresa May's announcement that she would call a snap UK general election on 8 June 2017 surprised many people. After weeks of campaigning, there was no outright winner, with both the conservatives and the labour party failing to secure the majority, resulting in a hung parliament.
Even though the Conservatives remain the largest party in the House of Commons,
Mrs May won 318 seats, meaning she was eight short of the majority target of 326.
The Conservatives lost 13 seats, while Jeremy Corbyn’s Labour gained 30. At the time of
writing this article on 22 June 2017, the Prime Minister is looking to rely on the support of the
Northern Irish Democratic Unionist Party to form a government.
Despite polls narrowing substantially over the course of the election campaign, a
Conservative-led government was considered the most likely result from the UK election by
investment markets. But general elections create uncertainty, and markets do not like uncertainty.
Markets can be affected by all sorts of economic and social factors, including
political decisions, consumer confidence and global events. Elections are no
exception, and the outcome of this general election will have an impact on market
conditions going forward.
With this in mind, you may be considering what the result could mean for your investments, but
it’s important not to panic. Changes can make things uncertain, but the rise and fall of market
prices are a normal part of investing.
General elections have the potential to unsettle markets, given the uncertainty over
the outcome and impact on the economy. Political events should not ordinarily prompt
you to change your investment strategy over the long term. Market timing is incredibly
difficult. You cannot predict for definite which way any currency or stock market index will
move next, and many factors aside from politics – such as company events, inflation
and deflation – affect how markets move.
Investors ideally need to focus on their long-term strategy and goals rather than any short-term
impact that a political event may have on performance. Remaining with a buy-and-hold approach in funds and shares with good quality underlying businesses should avoid missing out on long-term gains. Diversifying across several asset classes and currencies is also important. Having a spread
of different assets that come with varying degrees of risk will reduce the likelihood of
portfolio values being damaged by a fall in one particular market or area.
In addition, putting some cash aside at times of uncertainty can give investors the flexibility
to act as more information becomes known over the coming weeks and months. Volatility
also brings considerable opportunities, and investors should avoid knee-jerk reactions.
The unexpected general election result has a number of implications, including what this
means for Brexit negotiations and whether a hung parliament may result in a ‘softer’ Brexit
than markets had been anticipating. A ‘softer’ Brexit would also be welcomed by business,
and a fall in sterling could offset market falls given the significant proportion of overseas
earnings for large-cap companies.
Investors who are concerned about the impact of the election result may want to review their
portfolio and ensure their investments are spread across a range of assets, including cash, bonds and equities, alongside different industry sectors and geographical regions.
This may help reduce any volatility that could result from UK economy jitters if investors fear
Brexit could lead to a recession over the next few years. The longer investors stay invested in
the stock market, the greater the potential for future positive returns.
No one can predict for definite which way any currency or stock market index will move
next, whatever form the next government takes. Besides which, aside from politics,
there are many factors that may affect market movements. These may include inflation,
monetary policy and specific company events.
DON’T TIME THE MARKETS
Trying to time the market without the benefit of hindsight is hard. This involves making
investment decisions at the moment when you believe markets will rise to benefit from any
upturn, effectively speculating on the outcome.
This is a very high-risk strategy and extremely difficult for investors to do successfully. The
impulse to act can lead to mistakes and mismanagement of investments. Selling during
periods of weakness in the market creates a guaranteed loss. The trouble for investors is that
trying to time the market during rough periods can further compound losses in their portfolios.
ACHIEVE SMOOTHER RETURNS
Investors should have a well diversified portfolio – with a mixture of assets such as shares, bonds, cash and property, and a mixture of different sectors and countries within this group of assets. By being invested in assets that fall less in a crisis and spreading the investments, investors can achieve smoother returns than investing in just one type of asset, without reducing the expected level of returns. As a result, diversification improves the risk and return profile of a portfolio over an economic cycle. It’s essential to obtain professional advice to help to ensure
your portfolio is well balanced for the amount of risk you’re comfortable taking –
and can afford to take.
KEEP YOUR LONG-TERM GOALS IN MIND
One of the main concerns for any type of investing is market volatility. It is important to
note that short-term volatility is not necessarily indicative of a long-term trend. The advantage of
long-term investing is found in the relationship between volatility and time. Investments held
for longer periods tend to exhibit lower volatility than those held for shorter periods. If you have
a particular goal in mind with a deadline, stick to that. Don’t be distracted by the short-term noise of the markets.
TAKE ADVANTAGE OF TAX-EFFICIENT VEHICLES
Minimising taxes on your investments is a key part of earning better returns. It’s sensible for
investors to continue making use of existing tax-efficient investments, such as Individual
Savings Accounts (ISAs) and pensions allowances. If appropriate, it’s important
investors do not overlook the effect that tax wrappers – such as ISAs and a Self-Invested
Personal Pension (SIPP) – can have on a portfolio. It makes sense to use all of one’s tax
allowances every year.
For investors concerned about where the market may move next, regular investing may
help to take the emotion out of investment decisions. This strategy means investors
buy more shares when prices are low and fewer when they are high. Making regular
investments, perhaps on a monthly basis, is a good way to deal with volatile markets.
This is called ‘pound cost averaging’. By investing regularly, investors smooth out the
highs and lows of the markets by purchasing investments when their prices have fallen and
benefiting when prices rise.
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. Stocks and shares ISA Investments do not include the same security of capital that is afforded by a cash ISA.