A favourite expression of mine when discussing estate planning with clients is ‘giving with warm hands’. What this means in simple terms is making gifts whilst you are still alive, rather than waiting and passing on any inheritance after your death. Not only can this be a great way to help children or grandchildren financially at a time when they may most need help, but it can also reduce the taxable value of your estate.
Clearly the first priority is your own future financial security and ensuring that you have enough money to live on, but with over £5.4bn paid in inheritance tax (IHT) last year, planning now could ultimately save your loved one’s thousands. The first step with any estate planning is to ensure that you have valid, up to date Wills and power of attorneys in place. I would also suggest that you keep a list of your assets recorded somewhere. You can then start to consider how and when you would want your loved ones to benefit and you may find it useful to involve your family at an early stage. In most cases, any gifts will be available to the recipients to enjoy immediately. Depending on your wishes however, rather than make a gift outright, you may decide to delay when the funds become available by making a gift into trust. In general, money given away before you die is usually still counted as part of your estate and will be subject to inheritance tax if you die within seven years of making the gift. There are however certain types of gifts which are treated as being immediately outside of your estate for inheritance purposes. These include, the first £3,000 given away each tax year. In addition, if you don't use this annual exemption one year, you can carry it forward for one tax year – meaning that up to £12,000 per couple can be gifted in this way. Another less well-known way of making gifts in a tax efficient manner is to make regular gifts out of income. These gifts must be from your post-tax income and leave you with sufficient income to maintain your standard of living. Parents and grandparents can make one-off gifts on the marriage of children or grandchildren (up to £5,000 and £2,500 respectively), whilst marriage gifts to anyone else are subject to a limit of £1,000. It is also possible to make small gifts, of no more than £250 to any one recipient per tax year. These are again completely free of IHT, provided they haven’t received a gift which uses another exemption. Finally, gifts to charities or political parties are also exempt from inheritance tax. Clearly there’s a lot to think about with estate planning and whilst for many people reducing their IHT bill is likely to be important, don’t forget that the starting point should always be ensuring your financial security in old age. If you feel that you could benefit from advice in this complicated area, please do not hesitate to contact us for an initial no obligation consultation at our cost. Please note that levels of taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Inheritance Tax Planning. Most people are likely to have number of old pension pots scattered around and often many of these will be older, less flexible, and with high fees. With rising average life expectancy, the increasing state pension age and the move away from gold plated final salary schemes, it’s important to make sure that these plans are working for you. The smallest change can make a huge difference to your income in retirement.
Typically, there are five main reasons people would want to consider consolidating their pensions in one place – simplicity, lower charges, better service, more flexibility, and wider investment choice. Transferring your pension pots and consolidating them all under one roof in a modern contract not only means that you can keep track of and monitor your pension savings more easily, but potentially you could also benefit from lower charges. A high proportion of older, less flexible plans may now be closed to new business, which means that providers are very unlikely to want to invest in improvements to either their service or their offering. Modern contracts are also likely to offer more flexible withdrawal options together with a wider investment choice compared to some older contracts that may only offer limited investment options. There are however some points to watch out for before you transfer and consolidate your benefits. The first is to check if there are any exit penalties or charges to transfer out of the old scheme as clearly this may negate any benefit in transferring. Another issue to look at is whether you would lose any valuable guarantees or benefits on transfer. Some older schemes, for example, offer generous guaranteed annuity rates (GAR) which could typically be around twice the current annuity rate for someone in good health. Whilst this can be a hugely valuable benefit, the downside to a GAR is that people need to buy an annuity which may not suit their needs. Hence keeping a plan with a GAR may not be suitable for everyone but nonetheless shouldn’t be given up without careful consideration. Some pension plans, where benefits were built up before 2006, may be entitled to a tax-free cash sum above the normal 25 per cent. However, in most cases, the higher tax-free cash will be lost on transfer to a new plan. A pension is a long-term investment not normally accessible until 55. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. In summary, consolidating your pensions into one modern contract is likely to be a good idea for many, but there are some situations where remaining in the older contract may be the best option. If you are looking for expert financial advice to help you make the most of your existing pension portfolio, please do not hesitate to contact us for an initial no obligation consultation at our cost. |