How To Pass It All On, Photo by Kira auf der Heide on Unsplash

Passing It On

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.

#2 Wills

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.

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.

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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.

Summing up

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.


Disclaimer

Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.

Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!


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11 Replies to “Passing It On”

  1. Sundays “Money to the Masses” podcast was all about the ‘where to find it’ list – not the most riveting of episodes but great pointers in there and also references the digital challenge. I’ve been doing this on and off during lockdown for my farther’s affairs, as he no longer has capacity, it’s bloody hard work knocking out letters to pension companies and chasing through accounts which may no longer exist etc!

  2. I have heard of some shocking JISA stories from friends. So I kept to Child SIPPs. A change to JISA should be to set an age.

  3. I would highly recommend setting up POAs. We all think it will never happen to us but apparently 10% of people aged 65 and over suffer from dementia and it seems to be a lottery. Both my parents had this, and it just creeps up on people over an extended period without them noticing that they are no longer functioning. When my father died he had dozens of accounts with banks and brokers and some properties and even with a POA it was a very long and complicated job to sort out the estate. As you say there are few tax advantages these days to trusts but I have a simple arrangement in my own will so that my son will only receive his inheritance at age 25 and the trustees are a couple of old friends who unlike anyone in my family understand investments.

  4. I have a few friends (in their 60’s) who died without having their affairs in order and this caused ALOT of problem to their love ones.
    Since then I have put all my details on a memory stick hidden in a safe place in a location known to my main beneficiaries. I have copies of all relevant documents etc. So I am in a far better place than my friends but it has downsides.
    1. You have to keep it up to date as things change. (Although just storing say broker details rather than all your stocks avoids some of that.)
    2. If my house burns down I assume the memory stick is lost.
    3. If I die at the same time as my main beneficiaries and the minor ones are then in a pickle since they do not know of it existence/location.

    It would be helpful if there was a 100% secure and safe location are on the internet that information was encrypted and the key released as per instructions in a Will. Being on-line make it easier to update and avoids the destruction issue. Alas I have not come across such a service.

  5. Really good article in my view. Made me think.
    1. Annuities v drawdown – done. Drawdown.
    2. Wills – done and reviewed in December as originals kept with solicitor who has been taken over. They confirmed these are now held at the head office of the new company in Birmingham. Quite a surprise as I live 100 miles away!
    3. Inheritance tax – don’t think it affects me but will review. Need to check my parents situation.
    4. Lasting Power of Attorney – not done that yet. Currently finishing off my father’s two, having done my mother’s 3 months ago.
    5. Protecting our income – done. Checked because of this article. Decent defined benefit pension which wife gets 60% of if I die. No life insurance. Looking at outgoings verses income now and taking into account inflation, and the fact she will get a decent state pension, we feel she’ll be ok.
    6.The Where to Find it List – to update
    7. Investing for the kids – done. (Well got her through private education and a fair amount of university).
    8. Passing on Investing Ideas – done, wil continue to do. Well she’s not interested in money in the slightest and is not demanding in any way, BUT that’s currently. She’s 25, single, no house or real commitments. I’ve sat down with her over the last 2 months and taken her through the basics and a bit more. She’s now drip feeding money into a world tracker in a LISA. Yippee! I consider this to be my greatest financial achievement. (Pat on the back to self). If she doesn’t buy a house and continues to invest, she’s got an assured retirement – well as certain as one can be.

  6. @Bearcatbear – haven’t listened to that podcast in a while so will check that one out. Thanks for the heads up. It was a few years ago that I came across this idea (still can’t remember where though!)

    @JJ – Interesting. Not heard any first-hand stories myself but I know some people are very wary of them for this reason.

    @Andrew59 – Glad you found the list useful!

  7. One small thing, pensions are not in wills but in the Nomination of Beneficiaries with the Pension/SIPP provider.
    What you might want to do in the Will, say with children, is that they catered for by the Nomination of Beneficiaries.
    Extremely more tax efficient if you die before 75

  8. Thanks again for some good reminders here, ITInvestor. One thing I would add from my own experience is to remember to make sure that any life insurance is written into trust, with your beneficiaries named. Therefore the payout, if you die during the term of the policy, falls outside your estate for the purposes of IHT. It can also then be paid, I believe, before probate has been granted which may help with other aspects of the estate at a time when money is tight. I took out life insurance and asked for it to be written into trust but the IFA totally forgot about it. This isn’t something that involves solicitors – you just need to get a simple form which the policy providers will send through. You have to name some executors, that’s it. Could save a lot of tax if your estate is liable to IHT, which these days is highly likely if you live in London.

  9. I made the decision to take my tax free pension lump sum early and buy investment trusts in isa wrappers in the names of my children (age 18 onwards). This provides scope for funding further education/house deposits with tax free growth. Accounts are online and although they know I am using their allowances they do not know the value of investments etc. and have no knowledge of how to access them. They don’t seem to be interested either. This also has the benefit of reducing my risk of exceeding the pension lifetime limit. There is a lot of scope to transfer wealth in this way before they start to earn enough money to to fund isas themselves.

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