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Don’t Make Them: Five Inheritance Tax Mistakes

​​Face reality - make smart choices

Nobody likes thinking about death – particularly not their own.

But, facing that reality is central to the financial planning process, helping you to decide how much you need to save for retirement and how your loved ones will manage when you’re gone.

To ensure this, you must avoid any or all of these five common mistakes of inheritance tax - IHT- planning.

''You spend your working life building up your wealth and you ought to do what you can to ensure that, after you, those you choose can enjoy all of its benefits, without the taxman taking his substantial cut.''

1. Failure to plan

Not having any estate plan at all is the most common mistake. Perhaps people fall into this trap because they don’t want to think about it and keep putting it off until it’s too late. Or maybe they simply don’t think through the possible tax consequences for their estate and what these might mean for their loved ones. If you make no provision, it’s possible that when you die your spouse will be faced with a significant proportion of the assets, on which you have both relied, being taken away in tax.

2. Failure to draw up a will

Sadly 60% of people in the UK don’t have a will. This is the most basic estate planning tool and everyone should have one. You will die - it's a matter of fact. Many people have the attitude of: 'I won't be alive, so I'm going to spend it.' But what about those you leave behind?

Working on the assumption that you won’t have anything left when you die isn’t necessarily true. If you’re a husband and wife: what happens if one of you dies first and you die without having made a will? Then it can be a long drawn-out and expensive process for your surviving partner to secure control of your assets – at a time when they’re suffering more than enough stress and distress.

There can be particular problems for those with step families or who are not married to their partners. Dying intestate – without a will - is not ideal in any circumstance and we wouldn’t recommend anybody not to have a will, no matter how isolated they might feel.

Failure to make a will can have severe inheritance tax implications. If, for example, you’re single, your estate could go to your parents on your death and this adds a layer of IHT the estate will eventually have to pay.

Your will needs to be reviewed every few years to make sure it still meets your wishes. In addition, when drawing up the will, consider also appointing a power of attorney, so that somebody can handle your affairs, including your finances, if you should become incapacitated.

Retired Family Reading

Avoid mistakes to ensure a happy retirement 

3. Not using trusts

The most IHT way of leaving assets to people. But trusts are an often overlooked way of laying down how your estate should be managed after your death.

Putting money into a trust means it’s not going into anybody’s estate and, as trusts normally last for 125 years, this means you’re deferring inheritance tax on the estate for several generations. The rules around trusts are complicated and, despite the long term savings, there’s the short term expense in setting one up and they’re not for everyone. 

But, they should be considered as part of a strategy for minimising IHT liability.

4. Withdrawing funds from your pension fund and giving them away

People like to be kind. They like to give money away to their family and friends. It may be that upon reaching 55 and gaining tax free access to their pension, they want to help children buy a car or even a house.

But, the gifting rules say that only up to £3,000 can be gifted per tax year, although a year can be carried forward if not used. If you make a gift of more than this and then die within seven years, it could be considered for IHT. If you do this, you’ll have taken money out of the IHT-free wrapper of the pension and put it into an estate that is liable for IHT. If you die within seven years, your estate will have to pay tax on that money as though it were still in it.

If you’re making gifts of tens of thousands of pounds or more, this could be pretty significant and the worst-case scenario is that your children, who may well have spent the money, could be left facing a hefty tax bill. If you hadn’t done that and had died at the same age, that fund could have been passed to your children and - if you were under the age of 75 - they could have had it completely tax-free.

Reeves can make sure you avoid these mistakes

5. Not speaking to a financial adviser

An experienced financial adviser - such as Reeves - can review your estate, discuss with you how you want to dispose of it and then help you draw up a tax planning strategy.

Not having one can have serious implications if you have complicated assets or doubts about your own ability to draw up an estate plan.

These are all easy mistakes to make and that makes them easy to avoid. Don’t put off consideration of the problem, seek advice and put in place a tax efficient plan that will avoid hardship, stress and a large IHT bill for your loved ones when you are gone.

​The financial conduct authority does not regulate tax and estate plannin. These articles are for information only and are based on specific client circumstances which may be different to yours. No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.

What’s your retirement going to look like?

​​Retirement planning has changed over the past 20 years

With Reeves you can plan your retirement

There was a time when pensions were relatively straightforward, but retirement planning has undergone some radical changes over the past 20 years.

For one thing, final salary pensions are becoming less common and the qualifying age for a state pension has been pushed back. On the other hand, people have been given the ability to access their pension funds with greater flexibility.

''There are many benefits with the new pension environment, but it does call for some planning.''

To do this, you have to have an idea of what income you’ll need in retirement and, for the plan to be realistic, you need to recognise that that will vary during the course of your retirement. We’ll look at the four key stages of retirement for one client, Dave.

1. Growth stage

This is actually the stage running up to retirement, when Dave is still accruing wealth and at a greater rate than at any other time in his life. His children have left home, finished university and are finally largely paying their own way. He is in a senior position in his career with the highest salary of his working life. During this period, Dave is making his retirement plans and saving. 

2. Pre-state pension retirement stage

Like most people, Dave gives up work at 57 - ten years before the state pension age.

These are the golden years of his retirement. Both fit and healthy, he and his wife Jacqui can realise their ambitions of going on a cruise, visit her sister in Australia and he can buy and restore a vintage British motorbike.  Fortunately, their outgoings are much lower, the mortgage having finally been paid off just before he gave up work.

This means that he needs an annual income of £25,000. He has his pension and ISA and cash savings and he will continue working part time which will earn him £8,000 a year.

Our advice to Dave is that he makes up the difference of £17,000 between his outgoings of £25,000 and his part time income every year by using his ISA savings and by drawing £4,500 out of his pension. That way, he is making full use of his £12,500 annual income tax allowance, which would otherwise be lost. He is also safeguarding his tax free savings for the future when he will need them. If you don’t use your income tax allowance, you are effectively inviting the taxman: 'At some point in the future, tax me on this money’.

​Proffessional advice can help you achieve your pension goals & objectives.

3. State pension stage

When he’s 67, Dave qualifies for the state pension of £7,500 a year. He and Jacqui have fulfilled their greatest – and most expensive – ambitions, but they’re still active and in good health and still want to travel.

So now, Dave only needs £20,000 a year, but he has given up his part time job. After his state pension, he has to find £12,500, so he draws £5,000 from his pension (to use his income tax allowance), with the balance of £7,500 coming from his savings.

With our advice Dave and his wife can fulfil their ambitions 

4. Old age stage

At the age of 77 Dave is slowing down. He and Jacqui only travel occasionally, they go out less often and have given up driving. So, now Dave can comfortably get by with an income of £12,500. All of this can be met from his state pension and his own pension without paying any tax.

Like Dave, many people can do much more in their retirement years than they may have thought possible, as long as they plan and don’t just drift into retirement and allow for the fact that their income needs will change as they get older. For the best and most tax efficient way to structure your retirement strategy, you should always seek professional, independent advice.

This example using Dave is a fictitious example, however it demonstrates how a flexible retirement strategy can be used to meet a clients varying needs through retirement. Your needs may differ and income requirements may be affected by things such as long term care needs so careful planning is key.

​No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.

A Friend in Need

​​More than just financial advisers

We helped Tom make sensible decisions to help him through tough times

At Reeves, it’s fundamental to our approach that we see ourselves as more than just financial advisers but that we build deeper relationships with our clients based on a mutual trust and understanding that is closer to friendship.

Everybody likes to share good news about themselves – it’s a natural and understandable.

But, the other side of that coin is that many of us are much more reluctant to tell others when things aren’t going so well in our lives. There may be feelings of vulnerability, embarrassment or even shame. The natural instinct is to circle the wagons and keep problems within a small circle such as family or friends.

As such, we’re delighted when you contact us with good news, such as a pay rise or windfall and want to pay more money into a pension. But, it’s just as important that you get in touch during the darker times.

"Whatever stress you’re under, you don’t want the added burden of financial worries and we can help find a solution to your problems.''

We recently had a client who we’ll call Tom, who is in his late 50's. Tom rang us to tell us he was suffering from a mental health problem. He was planning to take 12 months off work to deal with this and wanted to take £10,000 out of his pension to replace lost earnings during that time.

This rang some alarm bells as we’d already identified Tom as being financially vulnerable. He didn’t have all the savings or pension to fulfil his retirement plans and this proposed, unplanned withdrawal mean his pension pot would last him an even shorter time.

We discussed this in complete confidence and came up with a bespoke solution for Tom.

First, we established the facts: exactly how long was he going to be out of work? Was it really 12 months, or possibly longer? We had to establish whether the figure of £10,000 was the result of careful and realistic calculation or an impulsive reaction to his situation. We can only act on facts, so we needed to question Tom on this, to establish just what his monthly needs and expenses were and the parameters of the period he was likely to be out of work.

No matter what, we can help you to a brighter future

Ultimately, a client’s money is their own and they're free to make their own decisions. But, we believe we have a duty as a friend to ensure first that the client understands that what they think they need may not be the best way to meet their requirements.

The solution we came up with for Tom was, rather than rush into taking a lump sum out of his pension, to make a series of sustainable, regular, smaller tax efficient withdrawals that he would be comfortable with.

Tom’s situation is by no means unusual. Somebody who is well today can be vulnerable tomorrow but we are here to help, we have the knowledge and the experience and have almost certainly dealt with similar problems in the past.

But, in order to help, we need you to get in touch and give us all the facts. Don’t keep it to yourself and make a spur of the moment decision under stress which may damage your long term goals.

Phone a friend.

Names have been changed to protect identities. These articles are for information only and are based on specific client circumstances which may be different to yours. No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.

What will you do with your 8,300 days?

​What will you do with your 8,300 days?

It’s now estimated that, on average, in the UK, a man aged 65 will die at the age of 86.9 years and a woman at 89.7.

In both cases, this represents a reduction of six months on the previous estimate, a decline variously blamed on NHS cuts, obesity, dementia and diabetes. Whatever the cause, the average retirement age is about 64, so it’s not unreasonable to expect to have 8,300 days of life after work.

How do you plan to spend those days? Also - have you made plans to ensure you’ll have something to spend during those days?

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Five Common Mistakes Made in Retirement

​Five Common Mistakes Made in Retirement

At Reeves we have all kinds of clients: people from all walks of life, professions and circumstances. Sadly, some of them come to us when they’ve already made mistakes in their retirement planning. Despite the great variety of these clients, it’s striking how similar these mistakes can be.

Here are the five most common.

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Property vs Pension: Which is Better?

​'My home is my pension'

`Bricks and mortar’ – the phrase has a ring of solidity and dependability about it.

It particularly resonates in the UK where we have long had a love affair with home ownership. So much so that many investors view property – either in terms of their own homes, or buy-to-let investments – as the best form of retirement saving and superior to any pension fund.

At Reeves we believe that pensions and property should both form part of your retirement planning. Let’s take a look at some of the strengths and weaknesses of each.

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