The astonishing growth of house prices in recent decades means that we can leave loved ones a substantial windfall when the time comes that we no longer need our home, wealth and investments any longer.
But it seems that millions of us may be in danger of inadvertently leaving our money to the wrong people.
Who is going to receive your money when you die?
There is more to estate planning than making a will.
Of course, a current will is an important first step, and will let you make it clear who you want to inherit things like your home and your investment portfolio, but it may not cover two key aspects of your wealth – your pension and your life insurance cover.
Both of these could be in danger of being given to the wrong people. The problem is that life has become more complicated for many people, with divorce and second or even third families now common. There were more than 90,000 divorces in 2018, according to the Office for National Statistics.
More complex family structures mean people are at risk of losing track of who will inherit their pension and insurance plans.
It’s a matter of trust
Inheritance tax – IHT – is at the root of the problem. It is charged at 40% on everything in your estate above the threshold of £325,000 known as the Nil Rate Band. Married couples and Civil Partners have a joint nil rate band of £650,000 (Tax year 2020/21). The introduction of the Residence Nil Rate Band (RNRB) in April 2017, means that the full value of the family home might not count against IHT liabilities. RNRB applies where the deceased leaves a residence, or the sale proceeds of a residence, to their direct descendants. This means that people would not need to sell a family home to pay IHT, and properly used, gives married couples and civil partnerships a maximum joint estate of £1m before IHT comes into effect. The RNRB for 2020/21 is £175,000, an increase of £25,000 from 2019/20.
One of the simplest ways to avoid this tax is to place assets in trust, meaning they fall outside of your estate when you die. Trusts are easy to set up and have become standard provisions for pensions and insurance policies.
Since pension freedoms were introduced in 2015, it has been possible to pass on any unused pension money to your family by having your pension plan written into trust. Life assurance can be put into trust in the same way – and it usually should be, or it will be the taxman who benefits from your cover, helping himself to 40% of the payout before your loved ones see a penny of it.
But while this means any leftover pension money can be passed on tax-free, it may not necessarily go to the main beneficiary of your will.
When you put your pension or insurance policy into trust, you have to name a beneficiary. But if your family circumstances change, this person might no longer be your partner or even a close dependent.
So, if you put your spouse down to get your pension when you die and later divorced, you would need to update your pension and insurance forms. If you did not, your former partner would still inherit the funds covered in the trust, even if you had a new will leaving everything to your new partner and children.
Pensions don’t form part of your estate on death, which means that – unlike savings, property and investments – they aren’t covered by your will.
What can you do?
At Continuum we believe that it is essential to check all your financial policies regularly. If you are recently married, divorced, separated, bereaved or widowed, you need to understand that it is a life changing event, and that a full financial review is vital.
We can look at your pension and life insurance arrangements and ensure that they are still appropriate for your new circumstances. The details of any policies held in trust can be aligned with your will so that the right person is named as your beneficiary, and it is your loved ones that can receive the support they deserve, rather than someone who may have become a stranger to you.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
The Financial Conduct Authority does not regulate estate planning, will writing, tax and trust advice.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.
Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.
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