Case Study: Passing on your wealth – The reaction is the best part of gift-giving, wouldn’t you want to be around to see it?

  • Cara Casey
  • 11 May 2023
  • 10 mins reading time

Could you tell us a little bit about how you got to where you are today as a financial adviser?

I initially started my career in banking and during this time I worked with a financial adviser. From a job standpoint, I really liked what he was doing. He was always sharing good news stories about how he was helping clients in much more depth than what I could have ever done in the banking industry. It was from there that I pursued a career in financial planning.

I’m a people person so my favourite thing about the job is the fact that I meet so many different types of people. My clients vary from a General in the Army to people that have sold businesses in really interesting industries, to widowers. That’s one of the biggest draws – not every day or client is the same.

Each client you form a relationship with and give advice to is different. They have different needs, circumstances, preferences, and willingness to take risk. When it comes to having conversations about passing on wealth, it can often be really difficult, especially if they happen to occur in the devastating times of losing a loved one. Is there a key piece of advice you tend to share with all clients?

When I first sit down with a client I always begin with finding out what their goals are. I like to drill down what the most important things in their life are and what they are looking to achieve in the future. Usually, if those conversations are robust and yield good results in terms of what they’re looking to achieve, it really lends to how important it is to pass on wealth. This is because the bottom line is, when you’re talking to clients that fall into that bracket of passing on wealth, it is usually clients who are close to, if not in, retirement. Before this stage in life, clients tend to look at building their wealth rather than passing it on.

A client at the life stage of passing on their wealth normally has two priorities; one would be to enjoy their retirement and aiming to make sure they are financially stable, with the ability to do everything that they want to. The second would be to help their family out. After establishing this, it’s important to understand their goals in terms of what they want to do in retirement and how they want to help their family. To better understand these goals, I use an internal tool available to advisers at Schroders Personal Wealth, called Voyant. This helps in terms of analysing their cash income and outgoings and particularly with passing on wealth as it can show the client that they are in a financially healthy position and then they can start to consider their legacy. This allows me to understand more about their family and how they may want to help them. Voyant can show the client things such as potential Inheritance tax (IHT) liabilities and how much tax might need to be paid. It can also highlight the lack of reliance some clients have on capital and that they could potentially start to consider helping their family out now rather than waiting for this to happen after they die.

Is there a particular scenario that you’ve experienced with a client where you’ve helped them with intergenerational wealth transfer and the costs that come with inheritance such as inheritance tax?

I met with a couple who had never had financial advice before and their wealth was built up throughout their working lives. They had a lot of capital being released through pension commencement lump sums, inheritances, etc. All of a sudden, they found themselves with quite a significant chunk of money sitting solely in cash. Excluding pensions, their estate value was about £2.9m. The residence nil rate band (RNRB) is £175,000 each so £350,000 together as a couple. You lose £1 of RNRB for every £2 you are over £2 million of a combined estate. As my clients had a joint estate which was over £2.7 million, they are at risk of both losing the NRB. As an adviser, I wanted to consider the best way we could start to reduce their estate value for them to benefit from it, with the aim over the coming years to get the estate close to, if not below, £2 million. The clients were aware that fully mitigating IHT would be difficult given their property value.

My clients’ main goals were to plan their retirement – making sure that retirement life would be enjoyable, as well as being able to help the family out where they can. They had a number of savings, and the wife also had some pensions that she hadn’t reviewed and at 68, she was considering actually taking them out and utilising them. At this moment in time, based on current legislation, pensions are outside your estate for IHT purposes. So, in terms of passing on their wealth, I began to consider a few options. Firstly, in order for the wife’s pension pot to be a long-term vehicle for their children, I suggested she review her pension pot, which helped change her mind set in terms of accessing that. Through Voyant, I was able to show her that there is no reliance on these pensions because the couple both had significant final salary and state pension income which they can rely on, as well as owning a number of rental properties.

Secondly, we spoke about their capital and decided some of it would be passed on to their children and their families as they didn’t want to directly gift money to their children, due to helping them out in the past. At this stage they had 5 grandchildren between the ages of 2 and 6 and they really wanted to make sure that from an educational standpoint, they were provided for. They wanted to put money away in a trust which they would manage themselves as they felt as though they had the capacity to do so. We put some money into an offshore bond. This was suitable for my clients’ needs because it doesn’t incur much tax when it’s invested and it can potentially be held for long periods of time (e.g., if the beneficiaries don’t need the money for 15 years or so). In addition, when the beneficiaries get the money, they are unlikely to be taxpayers, so there may be additional tax benefits when they access it.

The clients also have two rental properties which they are currently happy to continue running as they provide a regular income. However, what we did discuss as an option moving forward was, in 5-10 years, it may be good to sell one, release that capital, and then decide what they could be doing with that capital. Over time they may pass this capital on to their children as ways of gifting or potentially top ups into trusts, so our meeting was a clear starting point of a IHT planning journey. Overall, we identified that they have some cash now that they don’t need, so we agreed they’ll pass that on. We kept their pensions invested for the long term and over the coming years they’ll sell down further property assets. This meets their main goals to help with their grandchildren’s futures and they also have scope to help their children as and when further gifts are required as they haven’t fully utilised their allowances into trusts.

Important information

Fees & Charges apply at SPW.

The different scenarios discussed are examples and what is right for each person will depend on individual circumstances.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor might not get back their initial investment.

The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn’t guaranteed and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.

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