Pensions - Leaving a legacy
In 2015 UK pension rules underwent a series of generation defining changes. In this article Schroders discusses what investors should be considering with regards to annuities and how much of the pension pot they might leave behind.
One consequence of the recent changes to pension regulations in the UK is that for many there will be increased potential to ‘leave something behind’. As retirees in defined contribution pension schemes will no longer be effectively required to purchase an annuity when they retire, it is likely that many will reach the end of life with part of their pension pot still intact, which they will be able to bequeath to future generations.
The pension flexibility changes that came into effect from the March 2014 Budget mean fewer people are buying annuities, although there was already a decreasing trend in sales as low interest rates reduce annuity income levels.
Source: Association of British Insurers
A significant number of us will enter retirement with a considerable amount of assets. So-called ‘baby boomers’ (consumers aged 50-70) account for one third of the population, but according to a financial research survey carried out by GfK they hold almost half the nation’s assets outside of pension savings. They also enjoy a higher penetration of savings, investments and pension products than the average consumer and are more likely to have some level of property equity - over two-thirds either pay a mortgage or own their property outright.
Even those with relatively modest sums at their disposal have the option of balancing capital growth with income generation, thus creating capital that can form the basis of a future legacy. For example, investing in an income fund could generate a pension income while also growing capital.
Have you made out a will? A will is the only way to make sure your savings and possessions (your estate) go to the people and causes that you care about. It also reduces the likelihood of expensive and damaging disputes after your death.
In March 2014, the Charities Aid Foundation (which tracks charitable giving in the UK) reported that the percentage of people regularly donating to charity rose from 55% in 2012 to 57% in 2013. Total donations were estimated to be in excess of £10bn, with hospitals and hospices, medical research, and children and young people attracting the highest proportion of donors.
Did you know…
Inheritance tax is paid if a person’s estate (their property, money and possessions) is worth more than £325,000 when they die. The rate of inheritance tax is 40% on anything above that figure, although the rate may be reduced to 36% if 10% or more of the estate is left to charity.
- Decide where you want your bequest to go early as you might want to start the process before your death
- Talk to your family about your plans, otherwise your children and grandchildren may assume that all your assets will automatically pass to them
- Consider telling your descendants how you made your money or even suggesting how you would like them to spend any inheritance
- If you are leaving money to charity, seek professional advice to ensure the organisation is managed well and will use your bequest appropriately
What does this mean for me?
- The most important consideration for any adviser when it comes to retirement financial planning is making sure you don’t run out of money during your lifetime. However, it is also important that they respect your wishes in the event that you decide to leave a financial legacy.
- In the past, the lack of alternatives to buying an annuity meant many people were letting go of their savings at the start of their retirement, limiting their ability to leave a significant sum behind after their death. Fund investment could allow savers to protect their capital, giving them the option of leaving money to family members and/or charities while generating an income during their retirement.
- A key element of a flexible approach to retirement financial planning is regular reviews with an independent financial adviser.
Please remember, the value of investments and the income from them can go down as well as up and you may not get back the amount invested.
For more information on retirement solutions from Schroders, visit www.schroders.co.uk/retirement.
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