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Essentially Wealth Spring 2019

9th May 2019

INTERGENERATIONAL WEALTH – WHY IT’S GOOD TO TALK

In many families, having a frank discussion about wealth is something that’s a bit of a no-go area. Parents don’t always feel comfortable discussing money matters in front of their children, often because they want them to have a strong work ethic and don’t want them to become complacent about what they might inherit in the years to come. Older people don’t always like to dwell on the future, finding it difficult and distressing to open up a dialogue with their loved ones on sensitive issues like death and inheritance.

However, it’s widely acknowledged that learning money management skills when they are still quite young will stand children in good stead throughout their lives. With the older generation living longer and potentially needing help in managing their finances in their later years, it’s important for children and parents of any age to be able to communicate effectively about family wealth issues.

Helping you adopt a new perspective

Instead of each generation making their own arrangements, families are starting to consider how to use their combined resources in the best, most tax-efficient way to benefit all members.

For example, with many first-time buyers needing to borrow from the Bank of Mum and Dad in order to make their move, this is the perfect time to have a wider conversation about the effect this is likely to have on the whole family. For parents, giving or lending money can have implications for their retirement plans and the standard of living they can expect to enjoy during their later years.

Openly discussing wealth matters as a family helps establish financial priorities, clarify goals and ensure that the right plans are in place to support each generation according to their needs.

This is where we can help. We’re experienced in looking at family finances in a holistic way and are happy to be part of these discussions. We encourage all participants to be open and honest about their needs, now and for the future.

Once goals are established, we can help families put in place plans that will deliver the outcomes they seek. We enable them to do things like save and invest for the future, make lifetime gifts, and pass on wealth tax-efficiently to the next generation on their death, whilst ensuring that the practical needs of each generation are fully respected and addressed.

WITH THE OLDER GENERATION LIVING LONGER AND POTENTIALLY NEEDING HELP IN MANAGING THEIR FINANCES IN THEIR LATER YEARS, IT’S IMPORTANT FOR CHILDREN AND PARENTS OF ANY AGE TO BE ABLE TO COMMUNICATE EFFECTIVELY ABOUT FAMILY WEALTH ISSUES.


MORE THAN £5.2bn PAID IN INHERITANCE TAX – HOW CAN YOU CUT YOUR TAX BILL?

Inheritance Tax (IHT) is paid if a person’s estate (their property, money and possessions) is worth more than £325,000 when they die. Your estate will owe tax at 40% on anything above the £325,000 Inheritance Tax threshold (or 36% if you leave at least 10% of your net estate to charity).

Married couples and civil partners are able to pass their possessions and assets to each other tax-free (if UK-domiciled) and the surviving partner is allowed to use both tax-free allowances (when not utilised at the first death), effectively doubling their combined nil-rate band to £650,000.

The Residence Nil-Rate Band

From April 2017, the new family home allowance, the residence nil-rate band (RNRB), applies if you leave a main residence to a direct descendant like a child or grandchild, including adopted, step or fostered children.

The RNRB is £150,000 in the 2019-20 tax year, then increases to £175,000 in 2020-21. As the RNRB can be added to the existing threshold of £325,000, this would potentially mean an overall allowance of £500,000 from 6 April 2020 for those who are single or divorced, or £1m for those who are married or in civil partnerships.

However, where an estate is worth over £2m, the family home allowance (but not the individual allowance of £325,000) reduces by £1 for every £2 of value over £2m.

Seven-year rule

Under what’s referred to as the ‘seven-year rule’, gifts made during a donor’s lifetime can be totally exempt if they survive for seven years after making the gift. If death occurs within this timeframe, IHT is payable, although taper relief applies following the third year after the gift was made, and each subsequent year up to the seventh.

Other ways to reduce your IHT liability

You can make gifts of up to £3,000 (in total, not per recipient) plus any number of gifts up to £250 per other recipient during each tax year.

In addition, before the wedding day, each parent of a bride or groom can give up to £5,000; grandparents or other relatives can give up to £2,500, and any well-wisher can give £1,000.

If you’re able to do so, consider making regular gifts under the ‘surplus income exemption’. This enables you, subject to a number of conditions, to make a series of gifts from your spare income, free of IHT, as long as the person who makes the gift is able to maintain their standard of living after making the gift.

IHT can be complex, so professional advice is essential.

DIVORCED WOMEN AT RISK OF PENSION POVERTY

Divorce is always a sad and challenging time, made worse by the need to deal with family assets like the marital home. Much of the focus is quite rightly on making the best possible arrangements for any children involved. This often necessitates dealing with the family home, assessing its worth and apportioning its value.

Today, pensions can also represent a major financial asset that needs to be apportioned fairly between the couple. New research3 shows that women can lose out when it comes to sharing pension wealth on divorce. Apparently, women who divorce can end up with less than a third of the average pension wealth, with the average divorced woman over 50 owning pension wealth of £131,000 compared with £454,000 held in pensions by the average married couple.

Getting the right advice

Pensions can often be overlooked when dividing wealth on divorce. Many people think a pension solely belongs to the party who is named on the policy, but that’s not the case. A pension has to be considered in the division of the couple’s finances. Pension assets can be apportioned in various ways, by:

  • dividing the pension fund into two separate pensions
  • offsetting the value of one spouse’s fund by transferring a lump sum, or other assets, to the other spouse
  • arranging that when a pension comes to be paid, a portion goes to the other spouse.

Calculating the value of a pension can be complex, so it makes sense for women going through divorce to seek financial advice to ensure that they aren’t missing out on a fair share of what can be a very valuable asset.

3Royal London, 2019

WOMEN CAN LOSE OUT WHEN IT COMES TO SHARING PENSION WEALTH ON DIVORCE

IN THIS ISSUE

MILLENNIALS NEED ENCOURAGEMENT TO KEEP SAVING

Research has shown that 23% of UK millennials don’t have any savings. The reason may lie in data from the Resolution Foundation Report2, which shows that average real hourly earnings for British under-30s fell by 13% between 2007 and 2014.

The pensions bright spot

However, it’s not all bad news. From 2012, employers have been required to automatically enrol nearly all their employees into a workplace pension. While employees can opt out, if they don’t, then both they and their employers pay in to their pension account. This has been a very successful move, resulting in around 10 million extra workers saving for their retirement. Department for Work & Pensions analysis of employer schemes started in 2013 and 2014, shows that millennials were least likely to opt out of making contributions.

A step in the right direction

From 6 April 2019, the total combined contribution for an auto enrolled workplace pension scheme increased from 5% to 8% of qualifying earnings. Employers must make at least the minimum employer contribution of 3%, with the staff member making up the difference, usually with the help of Income Tax relief.

However, experts have suggested that in order to have a pension that equates to around 70% of pre-retirement earnings, the total combined contribution percentage needs to be between 10% and 15%.

2Resolution Foundation, 2018

PURSUING YOUR FINANCIAL GOALS – DON’T LET BREXIT GET IN THE WAY

Since June 2016, Brexit has cast its shadow over the UK and had an impact on the value of sterling, the business plans of companies, large and small, and the nation’s wealth. The economy has slowed, and growth has been sluggish at best. The economic impact is estimated to have reduced real household incomes by as much as £1,500 since June 2016.

You’ll still need to plan for life’s big events

However, it’s important not to let the noise surrounding Brexit get in the way of pursuing your personal financial goals. You still need to establish your objectives and keep them firmly in mind. Whatever the news, you should still think about saving for the future, contributing to your pension and planning for life’s big events. Unless you prepare now, you won’t wake up and find that magically you’ve saved enough for a home deposit, or that you’ve accumulated sufficient funds in your pension pot to allow for a comfortable retirement.

If you’d like some advice on planning your financial future, then do get in touch.

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK.
The guidance and/or advice contained within this website is subject to the UK regulatory regime, and is   therefore targeted at consumers based in the UK.