Inheritance plays a big part of the financial advice world – whether that’s helping clients leave assets for their children or helping customers deal with incoming wealth.
But recently, former pensions minister Steve Webb said that he believes that inheritance plays a large part in people’s retirement planning.
There are many questions that can be sparked from this comment:
- Does this mean Brits are too dependent on using an inheritance on retirement?
- Should they depend on inheritance to fund retirement and if so, will this be enough?
- Will there be too many Brits with not enough money to fund retirement if they rely solely on inheritance rather than on private pensions?
- Should Brits find ways to diversify their pension pots?
International Adviser spoke with Arbuthnot Latham, Atomos, Close Brothers Asset Management, First Sentinel Wealth, The Fry Group, GPFM Chartered Financial Planners, GSB Capital, Howard Kennedy, HSBC Private Banking UK, Kingswood Group, The Openwork Partnership, Progeny, Royal London, St James’s Place and Y TREE to find out some answers.
Two obvious flaws
Sarah Corney, financial planner at Close Brothers Asset Management, firmly disagrees that Brits should be dependent on an inheritance for their retirement planning.
She said: “An inheritance should undoubtedly be viewed as an unexpected windfall or a welcome boost to a retirement plan, but relying on a sum which is subject to so many uncertainties is not prudent financial planning.
“Two obvious flaws are the timing of a payment and the value of the eventual estate. Long-term care costs are expensive and without any changes in government policy on the horizon, elderly individuals are largely responsible for funding their own care for an undetermined time frame.
“The lack of control when considering either of these factors is not going to provide peace of mind when planning your retirement. Also, the beneficiaries of the will might not include you. Investing tax efficiently over the long term is key in establishing a prudent financial plan for retirement, thereby benefiting from gross roll up and making your investments work harder for you.
“Regularly reassessing the level of risk being applied to investments is a good idea when considering long-term savings; taking a higher level of risk when you are younger gives your savings the potential for long-term capital growth.”
‘No guarantee’
Jeremy Franks, head of wealth planning at HSBC Private Banking UK, also says there are more sensible ways to approach retirement planning than relying on inheritances.
He said: “Depending on a potential inheritance to fund retirement can be a risky strategy. Research shows that life expectancy has risen significantly, and people are often living well into their 90s. You may receive your inheritance later than you imagined – possibly when you have retired. Furthermore, increasing costs of later-life care means that there is no guarantee you will receive an inheritance. Even if you do, it might not be nearly enough to retire on.
“A sensible approach is to plan for your retirement without inheritance. Focus on creating a strategy that you can control such as contributing the maximum annual allowance to your pension.
“It is important to start saving as early as possible and review regularly to make sure the plan is on course to meet your needs in retirement. Carry forward could also boost your pension pot by using unused allowances from the previous three tax years.”
‘Build your own retirement fund’
Amanda Blakely, wealth planner at Arbuthnot Latham, also highlights the possibility of receiving no inheritance.
She said: “The over-reliance on a potential inheritance to fund your retirement is a potentially risky strategy. People are living for longer which means that you could be well into retirement before you receive any form of inheritance, and the rising costs of care could easily exhaust any prospects of receiving an inheritance.
“Instead, the focus should be on building your own retirement fund. The introduction of auto- enrolment has encouraged people to start saving into pensions, but many are failing to maximise their full allowances available.
“Plus, auto-enrolment schemes were initially focused on keeping costs low, but as these pots grow and with the current challenging investment market conditions, the focus should shift to delivering strong investment returns.
As this can have a massive impact on the eventual value of your savings come retirement, and in turn quality of life, I would therefore strongly encourage people to sit down with a pension specialist to review their overall retirement strategy.”
Dangerous strategy
Nicole Aubin-Parvu, legal director at Howard Kennedy, and Liz Palmer, partner at Howard Kennedy, emphasise the importance of increasing pension savings.
“While the hope of a future inheritance has always been a factor in people’s financial planning, the increase in house prices over the last half century has also increased the perceived significance of inheritance as a contribution to retirement,” they said. “As a result, people are becoming more critical of inheritance tax (IHT) and rising social-care costs, and how both may erode the value of what they ultimately receive as heirs.
“However, over-reliance on inheritance is a dangerous strategy. Ignoring social-care costs, as life expectancy increases, more of a parent’s income and capital is likely to be used up supporting themselves during their retirement. The IHT nil-rate band, the sum which an individual can leave to their heirs free of IHT, has remained at its current level of £325,000 ($414,000, €380,000) since April 2009, and is accordingly reducing in real terms, especially at current rates of inflation.
“There are also non-financial risks to consider. Children may fall out with their parents and be cut out of their wills. Second marriages and families are becoming more common, and potential disputes between first and second families, or even with siblings or other family members, after a parent’s death, have been occurring more frequently in recent years. When such disputes arise, they tend to erode the value of a deceased’s estate significantly in legal and other costs.
“For all these reasons, people should be trying, where possible, to increase their own pension savings to provide themselves with a degree of certainty for the future. If they can, parents might be better off making lifetime gifts to their children, perhaps taking advantage of available tax reliefs and exemptions, to help them build up such savings, rather than waiting to pass everything to them on death.”
The importance of reassurance
Jane Martin, chartered financial planner at Atomos, says that people waiting for an inheritance to fund retirement may be overlooking a key factor.
She said: “One of the added-value aspects of seeking advice in retirement is reassurance. Fixating on an inheritance to support retirement simply does not provide that reassurance. There is no certainty of date, amount or even if there will be any inheritance paid.
“In many cases, those who plan for their retirement without taking inheritance into account will often find that it then becomes surplus to their needs and will look to use a deed of variation and pass it down to their children and or grandchildren.
“Parents and grandparents can pass their pensions on to their beneficiaries and make third-party contributions of £3,600 gross (£2,808 net) each year which they may do as a capital gift or out of normal income rules.”
‘Anything but guaranteed’
Toby Band, managing director of First Sentinel Wealth, said: “Broadly speaking, Brits are too fixated on inheritance to fund retirement and they should not depend on inheritance to fund retirement.
“With 74% of over 65s owning their own home outright and the average UK property worth just under £300,000, it’s understandable that clients think a healthy inheritance will arrive at some point. Yet, with the average care home costing £40,000 per year and up to £100,000 for specialist care homes, a healthy inheritance is anything but guaranteed.”
He also says that many people don’t earmark their inheritance for pension savings.
“When advising our clients, we always model the future assuming no inheritance,” Band added. “The reality is, we don’t know when it will arrive, we don’t know how much will arrive and we also see many recipients use the funds to pay off a mortgage or fund holiday-home purchases. Rarely, does the inheritance go towards retirement.
“Even if the average inheritance of £334,000 does arrive in full, ignoring private-pension saving for retirement is a big mistake. The average couple needs £34,000 per annum to live moderately and £49,700 to live comfortably. The inheritance would soon run out after accounting for the necessary withdrawals and inflation.”
‘Start early, contribute consistently and diversify investments’
Max Sullivan, wealth planner at Kingswood Group, says there are key actions people can take to boost their pensions instead of waiting to inherit.
“Relying solely on a supposed inheritance to fund retirement is not advisable, as it is not guaranteed and may not be sufficient,” he said. “Instead, individuals should actively contribute to private pensions and other retirement-savings vehicles to take control of their financial future.
“Starting early, contributing consistently and diversifying investments can help boost pension pots. Individuals should also take advantage of employer contributions, keep track of pensions, seek professional advice where needed and consider additional income streams for financial security and longevity throughout retirement.”
View it as a bonus
Scott Atkinson, managing director of GPFM Chartered Financial Planners, part of Loyal North Group, says inheritance should be totally excluded from retirement planning.
He said: “Although it is predicted that over £5trn of generational wealth will be transferred in the next 30 years, it is always risky from a financial-planning perspective to rely on and factor in receipt of inherited funds when producing a financial plan.
“Family fall outs, changes in circumstances and care costs can quickly impact inheritances. It is our standard practice to completely exclude inheritance where ensuring clients can achieve their retirement objectives.
“Any inheritance should really be viewed as a ‘bonus’ when undertaking financial planning.”
Elsewhere, David Owen, wealth proposition director at The Openwork Partnership, says that relying on inheritance can lead to negative outcomes.
“The shocking fact is that many of us will get to retirement with an underlying health problem that will, over time, result in care and nursing,” Owen said. “This means that for many, the probable inheritance will be used on care fees. There is therefore a real danger that terrible financial decisions will be made while waiting for the ‘big, solve-everything’ inheritance. Instead, we ought to save well and spend with caution now as inheritance is an unlikely event.”
‘A gift, not a given’
Clare Moffat, pensions expert at Royal London, reminds that inheritance is not always as much as children might expect.
“Inheritance is a gift, not a given and can depend on a number of things, including the amount of money available; how many beneficiaries and any tax implications there are; how investments are looked after; and whether long-term care comes into the equation,” Moffat said. “There is a growing trend for parents to release funds to help their adult children financially, and it’s often forgotten that an inheritance will normally go to a spouse first. So, while it could be a nice ‘top-up’, it’s not the best idea to depend on an inheritance to fund retirement.
“We recently carried out some research where we asked how retirement would be funded. Unsurprisingly, the most common answer was a workplace pension (39%) and the state pension (39%). However, 13% responded that family inheritance would fund their retirement, so a significant number are depending on it.
“While auto enrolment is helping to fund retirement, it isn’t giving us the guaranteed income of defined-benefit pensions of old or the accompanying spouses’ pensions. Meanwhile, paying anything extra into a pension is currently competing with increasing mortgage costs and the general increase in the cost of living. The challenge is to ensure employers offer the best schemes possible to support their employees and for employees to make the most of them.”
‘Crucial to take responsibility’
Dean Kemble, chief commercial officer at GSB Capital Ltd, also emphasises that children should not depend on inheritance from their parents.
He said: “Many countries, including the UK, are facing the problem of insufficient retirement savings. Depending on inheritance as a plan is not a practical option, as most family assets are often linked to property and may be subject to inheritance or capital-gains taxes.
“There might be an assumption or expectation that individuals will receive a substantial inheritance from their parents or other relatives. In the event that this assumption does not come to fruition or falls short of expectations, what would be the alternative plan(s)?
“It is crucial for individuals to take responsibility and proactive measures towards securing a stable financial future for retirement instead of solely depending on inheritance. This requires addressing financial planning and savings habits and enhancing one’s financial literacy. Additionally, promoting pension options and investment strategies can significantly contribute to achieving this objective. An inheritance should be seen as a bonus to the retirement plan.
“Some people may have difficulty saving enough for their retirement because of gaps in their pension contributions. This could be due to inconsistent employment, being self-employed or experiencing periods of low income. Furthermore, as people are living longer, they require more funds to support themselves during retirement.
“Longer lifespans place added stress on retirement savings as well as state pension schemes. As a result, concerns about the adequacy of the state pension may lead some individuals to rely more heavily on potential inheritances. There is therefore even more reason to plan than rely on an inheritance.
“Finally, collaboration between government and private institutions should be front and centre for long-term planning. For many years in the UK, this area of government has not had the focus it deserves, with ministers changing on a regular basis.”
‘Never rely on any single source to fund retirement’
Richard Gillham, a financial planner at Progeny, says it is important not to make assumptions.
He said: “Many people may rely too heavily on a future inheritance to fund their retirement, but this presents numerous risks.
“Based on increasing life-expectancy figures, older generations are likely to live well into their retirement years and/or could incur significant long-term care costs, which can quickly deplete any assets for inheritance. It can also mean that people often don’t receive an inheritance until they themselves are in their 70s or 80s, by which time it may be too late to make a significant difference to their life in retirement.
“It’s worth noting that under English law, there is no forced heirship provision which mandates next-of-kin entitlement, in contrast to the law in Germany or France. Therefore, people have the ability and freedom to leave their assets to whoever they wish. Disinheritance is also a risk factor that should not be ruled out by the next generation.
“Other potential pitfalls include a property held as joint tenants passing to someone outside the family, such as a co-owner, and it’s important not to forget about the prospect of HM Revenue and Customs (HMRC) taking its 40% share via inheritance tax, if an estate is large enough.
“Essentially, it’s good practice to never rely on any single source to fund retirement, because it lacks any diversification, which is a bedrock of sound financial planning.”
‘Unintended consequence’
Eliana Sydes, head of financial life strategy at Y TREE, said: “Properties have long been thought of as profit-making centres and a means of preserving wealth for future generations in the UK. With people struggling more and more with pension savings, this cultural mindset has an unintended consequence: some individuals may become complacent about retirement if they anticipate receiving their parents’ properties as an inheritance, assuming it will sufficiently supplement their pension shortfall.
“We have observed a contrary trend when life planning for clients. Most of our clients in the UK do not express reliance on inheriting their parents’ assets, nor do they aspire to be dependent on such inheritances. Most people feel uncomfortable about ‘profiting’ from their parents’ deaths.
“Relying on inheritance to finance retirement can be deeply concerning, as there are factors beyond one’s control. The uncertainty surrounding a parent’s lifespan and health-care needs makes it risky to rely solely on inherited assets.
“Unlike certain countries where inheritance is safeguarded, the UK does not guarantee automatic inheritance rights to children, allowing individuals to allocate their assets as they wish. This raises two critical considerations for those depending on inheritance: ensuring sufficient value remains in the estate by the time you need it and confirming the parent’s intention to pass it on.
“Ultimately, depending solely on an inheritance assumes either having wealthy parents who will not need the assets themselves, or embracing significant financial risk.”
Cash-flow planning
Claire Trott, divisional director – retirement and holistic planning at St. James’s Place, stresses the importance of cash-flow planning for retirement rather than relying on an inheritance.
“Inheritances are rarely guaranteed, especially with regards to timing,” she said. “It isn’t something that you can influence either. This is where using inheritance for retirement planning is flawed. In current circumstances, parents may well still be healthy and active individuals when their children would ideally want to retire.
“It is difficult for the parents to gauge how much money they will need in their lifetime, so gifting is a difficult decision to make. It then all leads to needing to plan for your own retirement, dismissing the possibility of inheritance, at least in the early years of retirement.
“Cash-flow planning is a really good way to establish if you will have sufficient funds to retire at your chosen time. Things can change but it will give you a goal to work towards that can be incrementally adjusted as and when you review the plan.
“Plans should always be reviewed on a regular basis and stress tested against your goals. This will give a good indication and hopefully the right encouragement to save sufficiently. If there are some guaranteed funds in the future, these can of course be built in, but they must be guaranteed or will give false outcomes.”
Stumbling blocks
George Howard, chartered financial planner at The Fry Group, added: “I think a lot of Brits anticipate receiving an inheritance in the future and are relying on that to fund their future life, for example by repaying mortgages or providing an income in retirement.
“One of the biggest stumbling blocks in this way of thinking is that inheritance is not guaranteed. What happens if the parent(s) exhaust their assets during their lifetime(s), or the inheritance doesn’t come to fruition for whatever reason − what will they have to live on or support their lifestyles then?
“Another factor often ignored is the timing of inheritance – you may wish to retire at a certain age, so what happens if you have not received your inheritance by then? You may have to adjust your financial plans, especially with people today living longer.”
“While it depends on the circumstances, it is never usually advisable for someone to rely on an inheritance for any reason. There are a number of factors that could affect this, such as family disagreements and disinheritance; the donor spending all their money instead; the donor leaving it to someone else or to a charity instead; the timing of receipt of the inheritance misaligning with your planned uses of it; or even losing money through divorce or blended families.
“We would usually advise that individuals build up their own provision for retirement through a diversified portfolio more capable of providing an income sustained throughout retirement. It is commonly considered that individuals need capital of 25 times the income requirement per annum at retirement (if invested in a diversified portfolio) to provide for a 30-year retirement, also known as the 4% withdrawal rule. Any inheritance should be seen as a bonus on top of a safe and secure future that individuals build for themselves.”
