Seeding Change

Sowing the Seed

Reseeding

Introduction

While our later years are time for us to relax and enjoy our retirement, there are still areas of our personal finance that require careful management and ongoing planning.

Without the pressures of work, and our families now grown, it is time to turn our attention to what we want our legacy to be. However, later life and estate planning is a neglected area of financial planning, with only 11% of adults in the UK having some form of estate planning in place [1].

Legacy planning and thinking about what we would like to happen when we pass is a naturally emotional and difficult area, with complex factors to consider such as how we would like to be cared for, inheritance tax and the emotional and financial impact on our loved ones after we are gone. 

Putting in place a strong estate plan can provide some comfort in our later years, with the knowledge that our lasting legacy can continue for generations to come. 

Income in later life

Our retirement expenditure is much more likely to decrease in our later years for a number of reasons. Our health may begin to decline, our hobbies and interests may become more demanding or sadly, we may be facing our later years alone as a single individual.

If we are in receipt in income from our savings and investments, we will likely begin to reduce our withdrawal rate as our expenditure needs taper off. Understanding an appropriate level of risk to take at the age is dependant on our personal circumstances – our expected longevity, our financial security, and if we want to leave as much of our wealth to our loved ones as we can.

Financial security is a particular focus at this stage of life – we have limited opportunity to replace our wealth as we get older and higher risk investment strategies are likely inappropriate at this time.

If you have planned ahead and worked out a sustainable retirement income plan, you may be lucky to have residual wealth that you now want to pass on to younger generations – but this does come with additional complexities, including timing, affordability and tax consequences.

At Path, estate planning will always form part of your financial plan, with ongoing reassurance and support throughout. 

Long-term care

With the increase in life expectancy, particularly for women, more of us are seeing the impact that long-term care has had on our grandparents, parents and ultimately ourselves.

The average cost of long-term care in the UK is estimated to be £32,000 [2] although this figure can vary widely depending on where you are geographically located within the UK. Costs can be higher depending on the level of care that you need, with higher costs expected for conditions such as dementia where you may require specialist support.

Planning for long-term care should be made a priority – financial support from your local council is means-tested and the thresholds for care costs are very low. Should you have capital valued over £23,250, you will most likely be expected to meet your care costs in full.

Care costs can eat away at your hard-earned savings and in some cases, can mean the sale of your family home in order to cover costs. Lack of planning ahead of time could mean that your entire estate is spent on covering your long-term care needs, leaving little left for your loved ones to inherit.

There are various strategies and planning options available to plan for care costs – a structured plan can ensure you do not run out of funds and allow you to ring-fence assets for future generations. When considering the impact of long-term care, the earlier you plan the more likely you are to meet your needs.

Wills and Lasting Power of Attorney

Three in five adults (59%) in the UK do not have a valid Will in place [3].

The impact of passing away without a will – referred to as dying ‘interstate’ – means your estate is distributed according to specific rules, which may not be the outcome that you want or are expecting.

If you are married or in a civil partnership, with no children or grandchildren, your surviving partner will receive the whole of your estate.

If you are married and have children and grandchildren, and your estate is valued at more than £270,000, your surviving partner will inherit your personal belongings, the first £270,000 and only half of the remaining estate. The remainder of your estate is split into equal shares for your children – if you have grandchildren, they cannot inherit unless your children have passed away themselves.

Writing a Will is vital if you want to specify who you wish to inherit – as only close family can inherit via the Rules of Intestacy, friends and distant family members are left out.

As blended families become more common, a Will is also essential should you wish to leave an inheritance to stepchildren, or if you want to ensure children from a previous relationship are provided for in addition to your partner.

While only 41% of adults have a valid Will in place, the situation is bleaker for Lasting Powers of Attorney, with only 14% of the population having made provision for what will happen to their health and finances should they lose capacity [4]. The same study highlighted a further concern – a large number of individuals were unaware of what an LPA actually is.

Lasting Powers of Attorney come in two parts – health and welfare, and property and financial affairs. An LPA gives trusted family members or friends the power to look after you, make decisions regarding your health and care, and power to manage your finances should you lose mental capacity.

With conditions such as dementia rising and expected to increase rapidly in the next few decades [5], it is increasingly important to include LPAs as part of your long-term planning, and make your wishes and expectations known.

Inheritance tax

Recent freezes to inheritance tax thresholds mean more of us than ever will have estates subjected to inheritance tax.

Inheritance tax is charged at 40% at any assets above certain thresholds, although you can use certain allowances to mitigate the tax on your estate, including:

• The Nil Rate Band: the first £325,000 of your estate is tax-free. Anything above this threshold will be subject to inheritance tax.
• The Residence Nil Rate Band: if you are passing on a home to your children or grandchildren, you can benefit from a further £175,000, taking your total tax-free threshold to £500,000. However, if your estate is valued at more than £2million, you will begin to lose some of this exemption.
• If you do not own a home, you cannot benefit from the Residence Nil Rate Band.

The Nil Rate Band and Residence Nil Rate Band can be inherited by a spouse or civil partner on death, meaning that a total of £1million could be free of inheritance tax after your death.

A recent survey found that women in particular have limited inheritance tax mitigation strategies in place, in comparison to their male counterparts [6], with confusion around inheritance tax rules being much higher, concerns about financial literacy and not understanding the need for immediate planning.

As women are likely to live longer than men, female-owned estates are naturally liable for higher amounts of inheritance tax, as additional growth on the values of property and investments continue for a higher length of time.

There are numerous strategies, products and services that can go some way to reducing the amount of inheritance tax payable. Like with most financial planning, this area can get complex – seeking advice now on how best to pass down your legacy can offer significant value for your loved ones later on.

Charitable giving

Statistically, women are more likely to donate to charitable causes than men. [7] There a several theories as to why this is, most assuming that a natural caring and maternal instinct means we are more likely to give to causes that resonate with us and those that do good in the world.

Charitable giving as part of an estate planning strategy can also be useful – donating 10% of the net value of your estate to charity can offer a reduction in inheritance tax payable on death, reducing the rate from 40% to 36% and providing a larger legacy for your loved ones while doing good in the world.

Intergenerational wealth planning

With women more likely to outlive their partners, and therefore receive the bulk of family wealth first, it can feel overwhelming to suddenly be tasked with taking care of the rest of the family, particularly if you have not been the active financial decision maker before.

Increasingly, and more positively, women’s wealth in later years has come from our own personal success in our careers and our sensible financial planning, rather than merely passed on from a successful partner.

In either circumstance, planning and support is still essential in our retirement years to make sure our wealth continues to be managed and passed on tax-efficiently to our families.

At Path, we can explore all options available to you, such as gifting and trust planning, passing on your business, pension beneficiaries, nominees, and successors and ongoing portfolio management, to better meet yours and your family’s lifetime goals – both in retirement and beyond. 

[1] https://www.todayswillsandprobate.co.uk/main-news/majority-uk-adults-neglect-estate-planning/
[2] https://www.unbiased.co.uk/life/family-matters/long-term-care
[3] https://www.canadalife.co.uk/news/31-million-uk-adults-don-t-have-a-will-in-place/
[4] https://www.todayswillsandprobate.co.uk/main-news/the-nations-naivety-around-lasting-power-of-attorney/
[5] https://www.dementiastatistics.org/statistics/prevalence-projections-in-the-uk-2/
[6] https://www.ftadviser.com/tax-efficient-investments/2021/10/08/poor-planning-means-women-pay-more-inheritance-tax/
[7] https://www.statista.com/statistics/292929/giving-to-charity-in-england-by-gender/