What's important to you

What is inheritance tax?

Inheritance tax is the tax on the estate of a person that has passed away. The word estate sounds grand, but essentially this covers money, possessions and property. Collectively, these are known as your assets.

The standard rate of inheritance tax is set at 40%. The threshold is £325,000. So, if your estate is worth less than this amount (known as being below the nil-rate band), then there will be no tax for your family to pay when you die.

Married couples and civil partners can inherit their spouse's entire estate tax free. The surviving spouse can also now add any of their spouse’s unused IHT allowance to their own to increase the potential nil-rate band of their estate.

If none of the first spouse’s tax free allowance is claimed, this means a couple can effectively pass on £650,000 before inheritance tax has to be considered. On top of this, the residence nil-rate band with a maximum of £175,000 is transferrable between spouses.

Can I pass on my wealth whilst I'm still alive?

Yes. Not only are there many tax efficient ways for you to pass on your wealth sooner rather than later, but you get to see the difference your money can make to your loved ones whilst you're still around.

You could help to give your child or grandchild a head start in life by planning for their future today.

Trusts can be particularly effective if grandparents wish to pass money down the generations tax-efficiently. Starting a pension for your child has many benefits too, both in terms of tax savings and compounding returns (the series of gains or losses on an original amount of capital over a period of time).

What's important to you

How can I achieve a smooth income in retirement?

You’ve probably saved hard to build your retirement pot so it's important that you make the most of it. With the average life expectancy in the UK at around 80 years old, you could need to make sure that your pot will last at least 25 years if you plan to retire at 55.

Pension drawdown is a way of using your savings to provide you with a regular retirement income. But you need to make sure that you don’t run out of money. For example, drawing down as much as 10% of your retirement pot, if it was around £200,000, per year would only provide you with an income for 10 years.

There are options available to you which aim to make your retirement pot last longer whilst providing you with a smooth monthly income.

Should I take my pension savings as a lump sum?

Although this can be tempting, spreading your pension fund withdrawals across different tax years could save you a substantial amount.

You can take 25% of your pension pot without having to pay tax on it, so there’s some good news. But just because it’s tax free, it still may not be the best idea to take the lot at once. Drip feeding the tax-free cash, and combining this money with other taxed income, could be a better idea. It could help dip you below one of the income tax thresholds, lowering your tax rate.

Another good thing about leaving more tax-free cash in the pension pot, is that it can remain invested, and could continue to increase in value. And this means any future 25% tax-free element could also grow. However the value of investments, and the income from them, may fall as well as rise and cannot be guaranteed and the investor might not get back their initial investment.

What's important to you

How much will I need in my pension pot for retirement?

The answer to this question will be different for everyone and depends on what you want your retirement to look like. Start by considering what your retirement goals are and then think about what the lifestyle you desire might cost. It also depends on how long your pension pot needs to last.

A good rule of thumb when it comes to retirement income is that you should ideally aim to have saved enough from your combined pensions to give you an income equal to two thirds of your pre-retirement pay.

This is only a guideline amount though and your adviser would be able to give you a good indication of the annual retirement income you could potentially receive depending on your personal circumstances.

Although you may not have some of the expenses you have today such as mortgage, commuting and childcare payments, you may have additional healthcare costs and other discretionary expenditure tends to go up as you enjoy more leisure time and, perhaps new hobbies.

What regular income will I have in retirement?

When you start to work out how much you may need in retirement, it can be scary. For example, if you spend £20,000 a year for 20 years you would need £400,000; for 30 years its £600,000. And that’s before considering the effect of inflation on prices.

The good news is that you probably won’t be relying solely on your savings and investments.

Factor in how much you’ll get from state and final salary pensions (if applicable), which are thankfully a little easier to predict. You could also consider buying an annuity with your savings if you want the security of regular payments. But they can be expensive when interest rates and government bond yields are low.

You can check how much state pension you are likely to receive on the government’s website. You can also find out if topping up on incomplete years of National Insurance could improve the figure. However, you can usually only make voluntary contributions for the previous six tax years.

What's important to you

What's the best way to pass on my wealth to my family when I die?

Your will is the legally binding foundation of your legacy. You might think everything will automatically go to those you love if you die without making one. Sadly, that’s not always the case and dying without a will could make life difficult for your nearest and dearest. It also takes any decisions out of your hands as the courts will determine who benefits from your estate. This could be very different to your wishes.

You can also use your will to immediately put in place a piece of estate planning. Everyone can use something called the nil rate band – the amount we can leave free from inheritance tax. This is currently £325,000.

Wealth transfers between spouses and civil partners are free from tax including inheritance tax. So if your plan was to leave everything to your spouse, you could use this allowance to pass some of your wealth to your children, grandchildren or others tax free.

Can I help my family out whilst I'm still alive?

One way you could potentially improve the lives of your loved ones is to help them secure a better financial future. You could do this by helping them invest tax efficiently.

If the recipient of your gift is below the age of 18, then you need to speak to their parent(s) or guardian(s) about setting up, or topping up any existing accounts. Make sure everyone keeps a record of any correspondence or it might be considered a gift to the parent/guardian and they could end up with an extra tax bill.

Individual Savings Accounts (ISAs) can be a great way to support your family members financially. All capital gains and income generated within an ISA are free from tax and can be withdrawn at any time tax free.

Ask the recipient of your gift about creating an account if they don’t have one already. Or offer to top up their existing account if they haven’t taken advantage of the annual limit.

If they’re under 18, speak to their parents or guardians about opening a Junior ISA (or JISA). Once the child reaches 18, the JISA will transform into a standard adult ISA.