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Thinking about your inheritance and feeling guilty?

If you’re in your 30s or 40s, you might be experiencing the weird phenomenon that is: watching your parents get old. When did they get a full head of grey hair? How can you protect them from financial scams? And why are they talking about buying a bungalow? There was nothing wrong with their knees last time you visited! 

It’s around this time that you can find yourself wondering whether there’ll be an inheritance waiting for you when they’re no longer around. Should you… include the inheritance in your financial plan? You might feel like a terrible person for even contemplating it, but I’m here to tell you that A: you’re not a terrible person and B: you’re not alone. I always say to clients the following: “Are we making decisions today that we will later regret because we didn’t factor in a likely inheritance?”

Relying on inheritance is a risk

During the 2021/2022 tax year, HMRC made a whopping £6.1 billion from inheritance tax, giving us a glimpse into just how much money is inherited each year.  

When we contemplate how many estates will be passed on tax-free and how much money beneficiaries might’ve saved through careful estate planning, it seems foolish to ignore such large sums when planning our future. 

And yet, a lot can go wrong between now and the day you apply for probate. Your relatives might fund their retirement using an equity release product. The money you’re counting on could be eroded by care costs. Worst case scenario: you could even be disinherited! 

Relying on inheritance is a risk. Not only can it leave you worse off financially, we need to consider the psychological side too. If you don’t receive the inheritance you predicted, what impact will that have on your relationships with living family members? And will it affect your memories of those who passed away? 

None of these things are nice to think about but only by having these difficult conversations can we make responsible and balanced choices for our future. 

The key thing is to write a financial plan without any inheritance factored in first. Understand your own financial situation and then look at the likely gifts that might be received in the future. 

We don’t want you working unnecessarily

Although I feel strongly that relying on an inheritance can be a recipe for disaster, I also don’t want people working harder than they need to when there’s a good chance they’ll come into some money one day. 

The same goes for making unnecessary sacrifices when there’s a windfall just around the corner. You shouldn’t be working 12 hour days to save for your children’s education or fund a comfortable retirement. 

If, after looking at the numbers, we can find a way to avoid overworking and ‘underliving’, let’s factor that into the plan.

I believe a good rule of thumb is to take the figure that you think you might receive in future and halve it, just to be on the safe side. 

Some families are great at discussing how much money they have, at each stage of life. Communication is key. If that’s not your family, err on the side of caution. 

Enjoy the money now and gift responsibly

Thinking about the money you might inherit from your parents may trigger thoughts about how you’ll pass money onto your own children.

Even the world’s best economists and David Attenborough would have a hard time predicting exactly what the world will look like 40 or 50 years from now. But when we look at soaring property prices, the rising cost of living, and changes to the state pension age, it’s natural to worry about our children’s future. 

Could a lofty inheritance be Gen Alpha’s best chance of a comfortable retirement? Maybe, but what’s that old phrase about giving money with a warm hand, not a cold one? (Sorry if that’s a little too morbid.) 

Many of my clients come to me because of concerns about inheritance tax. They want to pass on as much as possible to their children (understandable) while keeping their tax bill as low as possible (also understandable) but many of them are unaware of the best inheritance tax tip there is: spend the money as you go.

The advice to give to your parents, and to yourself, is “Fit your own oxygen mask first, before you attempt to help others.” By that, I mean it’s important to fully understand how much money you will need for the rest of your life, before you can consider giving it away - even if that means paying inheritance taxes. 

When your child is born, squirrel money into a stocks and shares JISA. Surprise them with driving lessons on their 18th birthday. When they’re away at university and you feel overwhelmed with empty nest syndrome, remind them of your existence by putting some money in their account. Pay for cars, weddings, house deposits.

If your young adults ignore your pleas to stay enrolled in their workplace pensions, one option could even be to offer to pay their contributions yourself. 

As ridiculous as this may sound, when your child reaches their 30s, they’ll wish they’d listened to your advice. When they admit you were right all along, would you rather sleep soundly at night because they have a healthy pension pot of their own or be losing sleep because you’re worried about the impact inheritance tax will have on yours? 

If you’re counting on an inheritance to fund your own retirement, my suggestions above might sound too extravagant. Why would you pay into your children’s pension when you’re relying on your parents to inadvertently fund your own? If this sounds familiar, let’s talk about it. 

It’s my job to help you work out exactly what matters to you the most and find a way to achieve multiple goals without compromising your own financial stability. With good financial planning you might be surprised at just how much you can achieve — inheritance or not.

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