Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “The inclusion of unused defined contribution pensions in estates for inheritance tax purposes from next April is having a major impact on retirement planning, the latest research from Hargreaves Lansdown shows.
Before the change was announced, many people planned to spend down their other assets first and leave their pension for as long as they could, so it could be passed on to loved ones, free of inheritance tax. The change in the rules has since prompted people to think again and assess what can be done to reduce the value of the estate to save their family a tax bill.
The research shows that gifting is viewed as a key option. Around one in four people said they would access their tax-free cash and make use of their allowances to gift to loved ones while they are still alive, rather than leaving it in a will. One in four (22%) said they would draw an income from their pension and make gifts alongside that. The same proportion of people said they would still gift but would use assets outside of their pension to do it.
It’s understandable why people would consider gifting to loved ones as a means of reducing the value of their estate. Gifting to loved ones while you are still alive not only potentially saves them a tax bill but can also help them to meet their financial goals that bit earlier. It could be a one-off amount towards a house deposit or wedding, for instance, or regular contributions into a Junior ISA to help someone afford university later down the line. Contributing to a Junior SIPP can give a young loved one a real leg up the retirement planning ladder, that puts them well ahead of their peers. It can also act as an early lesson on the power of investing, which can go on to form a lifelong habit.
However, it’s important not to give away too much, too quickly. This risks potentially running short of money further down the line, which can cause serious challenges. Take a longer-term approach and assess the affordability of these gifts as you go. One in five (21%) said they would spend their assets to reduce the value of their estate. This may point to someone prioritising taking their income rather than gifting - again it’s crucial not to spend your assets down too quickly as you don’t know how long you are going to live.
The upcoming changes are going to have an enormous impact on retirement planning, and it’s important to understand the ramifications before acting. For instance, there are several different gifting allowances that can be used to reduce a potential inheritance tax bill, but they can be complex. You will also need to make detailed notes as to who you have given money to and when, so your family can evidence your gift giving if needed.
These are major decisions and it is a good idea to take financial advice. The data show that 27% said they would access financial advice before deciding, and this may grow over time. Advisers can play a vital role in making sure that you not only gift sustainably but also that your gifting does not fall foul of any rules that could leave your family with a large bill.”
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