My main investing aim is to build a portfolio to fund my retirement. But I’d also like to pass on a decent inheritance. Simple in theory but more complex when you get down to the nitty-gritty.
In my case, there are several aspects I think I need to consider. Some are purely financial while others are more practical.
In no particular order…
#1 Annuities vs. drawdown
Passing on your wealth is a lot easier now that there’s no longer a requirement to buy an annuity with the majority of your pension pot.
That rule change was made nearly seven years ago although the jury still seems to be out on whether it was a good idea.
For my own purposes, I was pleased to see it happen. I was never a great fan of converting my capital into an income stream (and a pretty low one at that).
I do think annuities can make sense in certain circumstances but I’m intending to go down the drawdown route. My pension pot is likely to stay in equities well past normal retirement age and I’ll take out money as and when I need it.
Of course, it’s possible that the balance could shift over time and annuities might offer much better value than they do now. In that case, I can change tack.
Perhaps more likely is that the rules around pensions change once more and annuity purchases are made mandatory again, perhaps to ensure a certain level of retirement income.
My wife and I made wills after we moved in together and tweaked them after we had children.
They aren’t particularly complicated but there are a few specific items in there we wanted to include rather than just letting the rules on intestacy dictate everything.
It’s been a few years since I looked at mine so I should probably dust it off again and check that it all still makes sense.
I don’t think anything major has changed about my financial situation in the past few years but I remember reading once that the only thing worse than having no will is having a badly drawn up one. That’s stuck with me for some reason.
#3 Inheritance tax
Now we’re coming to some areas where I need to do a bit more work.
Only about 5% of UK estates end up paying inheritance tax so it’s very much a minority sport.
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In theory, it’s payable at 40% over the nil-rate band (currently £325,000).
But transfers to your spouse are exempt and the current rules allow you to pass on any unused main nil-rate band for them to use as well.
There’s also a residence nil-rate band (£175,000) for your home, which can also be passed on if unused.
For some couples, this could mean inheritance tax only becomes due if their assets exceed £1 million.
You can also pass on your pension pot directly to a named person and this can reduce the overall tax due, especially if you die before the age of 75. (Technically, pensions do not form part of your estate and you should make an expression of wish for them so that your pension provider knows where the funds should be directed – see this helpful comment).
Plus there’s the whole area of trusts, although I believe the rules regarding these have been getting tougher and they are less advantageous than they used to be.
Finally, you can give away money in your lifetime although you need to do this in a certain way otherwise the money may still count as part of your estate for inheritance tax purposes.
The rules are complex and seem to change regularly so I’m thinking this may be one area I need to pay for some advice.
I know the basics but I’m definitely no tax expert and this seems to be one of those areas where a little knowledge can be a dangerous thing.
All that said, it is possible to vary a will up to two years after a person’s death so some inheritance tax planning can be done after the event, so to speak.
#4 Lasting power of attorney
This is another thing I really must sort out.
You can get two different types of lasting power of attorney. If you’re no longer able to do so, they allow someone else to look after your:
- health & welfare; and
- property and financial affairs.
They cost £82 each to register which doesn’t seem unduly expensive.
However, the cost of registering an LPA was a little higher in the past. If you took one out between 2013 and 2017 you might be entitled to a refund although the deadline for making such a claim is 1 February 2021.
#5 Protecting our income
When I was working full-time, I was lucky enough to get income protection and life insurance via my employer.
But now I’m part-time, doing a variety of stuff, I no longer get that benefit.
We thought this one through and, given the state of our financial affairs, we decided we didn’t need to replace these policies.
It’s possible our circumstances could change so this is something I should keep under review.
#6 The ‘where to find it’ list
I came across this idea a few years ago although I don’t remember where.
It’s a simple list of all the accounts and assets you hold so that your partner or executors know where to look. Ours is just written on a piece of paper.
I also try and keep any paperwork fairly organised although with everything online these days I seem to have a lot less of it.
I’ve heard of cases where people have passed away unexpectedly and their partners weren’t able to get into their devices and this made everything a lot tricker and more stressful to sort out.
So, I need to consider what happens to my digital assets as well.
#7 Investments for the kids
We’ve set up bank accounts and Junior ISAs for our children.
I decided global trackers are the order of the day when it comes to the JISAs as I wanted something low-cost that could run on autopilot if required.
I’m wary of putting too much into Junior ISAs, though, as once your children turn 18 they could, in theory at least, spend the lot straight away.
At the other extreme, I’m also reluctant of being too prescriptive and setting up trusts that can only be used for specific purposes.
I’m of the opinion that it’s best to take full responsibility for your own financial affairs so that you can learn how to grow your assets.
#8 Passing on investing ideas
My children are probably a bit too young to learn that much about investing right now but I’ve started to drop it into the odd conversation. Lucky them, I hear you say!
However, the whole pandemic thing has meant they’re getting a lot less practical experience with cash these days.
Pocket money seems pointless when they’ve hardly been into a shop for a year.
My wife doesn’t share my investment nerdiness so I’ve suggested she sticks to global trackers and checks their progress as little as possible, which she seems to be happy with.
I’ve got a fair bit of work to do in a few areas so I found this as a useful thought exercise.
Power of attorney and inheritance tax advice are probably what I need to pay the most attention to but the whole area of digital assets is becoming increasingly important.
I’d be interested to hear how others are approaching this topic or if you think I’m missing something fundamental.
Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.
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