Retirement planning – How to pass on your wealth to family

Sharon Bonfield looks at your options If you hope to leave something to children or grandchildren after you’ve gone.
retirement planning

If you hope to leave something to children or grandchildren after you’ve gone, it’s vital to factor them into your retirement planning now. 

This is because pensions and ISA savings can be handed down to the next generation – just like the family home or investment properties. It’s good to think holistically about the whole family’s finances when doing the sums and preparing for your own retirement and also how your later life savings might benefit them. 

Retirement planning vs inheritance 

Many people think that inheritance matters are something to ponder around the time of writing their Will*. It’s true that having a well-drawn-up Will that is kept updated as your circumstances change – is fundamental to ensuring your beneficiaries are looked after. 

But it’s better to start imagining what kind of assets you would like to set aside for each of your loved ones, and then creating a financial plan to achieve this. 

This subtle change in thinking is akin to focusing on the road ahead, rather than looking in the rear-view mirror. And this can be powerful when it comes to your family’s financial future. 

Passing on pensions to your family 

If you have a pension, the chances are you’ve been a diligent saver and have accumulated surplus pension savings alongside other retirement assets. These could be hugely valuable to pass onto the younger generation. 

You can assess what you have saved by seeking help from a financial adviser well in advance of your retirement. This will help you decipher what you will realistically need and what can be earmarked for your loved ones after you die. 

Defined Contribution pensions normally fall outside a person’s estate, so they’re not taken into account when Inheritance Tax is calculated. 

It’s becoming more common to skip a generation and leave pensions to grandchildren – in this way, they can become almost like a family trust. But it doesn’t even have to be left to a relative, you can leave it to anyone.  

The exception is when it comes to the state pension as this cannot be passed on. Similarly, Final Salary or Defined Benefit pensions often pay out to a spouse if the member (you) dies. 

These pensions can sometimes be converted into a pot of money held in a Defined Contribution scheme, which can be passed onto an heir. If you want to do this, it’s mandatory to take advice via a financial adviser if the pension transfer value would be worth more than £30,000. 

Passing on your Defined Contribution pensions depends on the type of scheme, the age you die and whether you’ve accessed the money, so it’s vital that you work with a financial adviser before making any decisions here. Otherwise your best-laid plans could become a headache for your loved ones. 

Here are some top tips to think about: 

  • If the recipient is handed the pension as a pension, there could be tax implications when withdrawing any money before they reach retirement age. 
  • The recipient can usually choose whether to take lump sums or an income from the pot. 
  • The recipient will not pay tax on lump sums from the pot if you die before the age of 75,  
  • The recipient will pay income tax at their highest marginal rate on most withdrawals if you die after the age of 75. 

Passing your wealth down to younger generations 

Factoring inheritance matters into your retirement planning can change how you save and it can help you and the family through different stages of your lives. For example, if you have an adult daughter with young children who works part-time, she may appreciate a boost to her pension. 

It may be that you want to contribute to a pension for your grandchildren. Even though most children do not pay tax, a parent or guardian can still open a pension in their name and add top-ups which are eligible for tax relief. 

Giving the under-18s a head start in their retirement planning may seem premature, especially since this generation potentially have university tuition fees and high property prices to contend with. 

But retirement will be very different in decades to come and the pension provision that they will be offered through the workplace will be less generous than it was compared with previous generations. 

So in summary, think about your finances holistically, taking account of your whole family’s needs and planning tax efficiently for the future. 

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. 

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances. 

*Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills, along with Trusts are not regulated by the Financial Conduct Authority. 

If you found Retirement planning – How to pass on your wealth to family helpful, you’ll find more content about preparing for retirement on our Finance channel.

Tags: , Last modified: March 17, 2022

Written by 5:27 pm News & Views, Finance • One Comment