In this pandemic, it matters more than ever to dig out your old papers on pensions, investments and life policies and carry out a review.
Our financial services company, Blackstone Moregate, has got exceptionally busy with people wanting to review and plan their affairs avoiding unpleasant surprises post this pandemic.
Here is a quick list of what might help.
- Will: Without a will, on death, the rules of intestate will apply, and your estate may not get distributed as per your wish. Have a look at this site https://www.gov.uk/inherits-someone-dies-without-will who is entitled to a share of your money, property and possessions if you die without making a Will. With Wills you should also consider Lasting Powers of Attorney over Property and Financial Affairs and Health and Welfare.
- Inheritance tax (IHT): This tax bites at 40% of your estate in excess of your tax-exempt allowances. With good planning in advance this tax can be avoided. Lifetime gifts, if made 7 years prior to death, will escape IHT 100%. Each of us have a lifetime zero rate band of £325k of our estate up to which no IHT applies and for many, a residential nil rate band of a further £175k each. So worth exploring dividing your estate with your spouse such that up to £1m, you are covered with no tax effect. Certain other types of gifts are also free of IHT.
- Life insurance: If you have any life policy, check and ensure it is written in trust as otherwise the proceeds of a claim on death will add to your estate which can be eaten away by the 40% IHT. When policies are in trust, you do not have to wait for probate for the funds to be realized.
- Pensions: Can you be sure of a comfortable retirement post pandemic? Volatile markets with recent dips and rallies, potential job insecurity, self-employment or having to work longer to pay for your mortgage, many are concerned. Where do you stand?. Pensions are fantastic tools for retirement income and family tax planning. . These days, pensions have become extremely flexible and versatile. You can merge and accumulate your various policies which make it easy to manage your investment strategy and charges. If you need short term cash you can start drawing on your pension at age of 55 and even less in cases of serious illness. It is important to check if your scheme has any special benefits or drawbacks. I recently found that one of my pension schemes had guaranteed annuity return (GAR) of 10.5%! This is nearly 3 times what you can get in open market. Whereas the other policy had not adopted the freedoms introduced in 2015. These changes would allow my pension fund to be passed down to be inherited by future generations free of IHT instead of it simply passing as a reduced annuity to surviving spouse. So, if you do not need the income it is now possible to leave funds that you want to pass down your future generation in a tax efficient way.
- Capital gains tax(CGT): This is currently 28% for higher rate taxpayers on property and 10/20% on other non-property gains but is expected to rise in future as the government looks to boost its coffers. We all have £12,500 personal allowance per year for zero tax to apply. One thing people forget is that CGT disappears on death. So, if you have assets that have accumulated a lot of gain and selling would trigger a large tax bill, it may be a consideration to hold until death. You do however need to watch the effect of IHT as this tax counteracts with CGT.
One thing to always remember is that your created wealth is there for you first and then for the next generation. So do not preserve for them when you can and must enjoy for yourself. Do not give away everything or get worked up on tax effects. Plan to enjoy it.
Take time to understand your monthly/annual net spend. You will be surprised of this figure when you consider no mortgage, insurance premiums, or school fees etc to pay. In the current low interest, low returns and volatile markets you will need a bigger portfolio to pay for what is required. But if you work on annual spend of say £40k and estimate 20 years to live, that is £800k and you are covered!
I believe it is useful to regularly review your financial affairs with your adviser enabling you to achieve your financial goals and security.
