💸 In the coming three decades, an estimated £5.5 trillion is projected to transition between generations as the baby boomer population diminishes. This remarkable event has been recognized as the largest wealth transfer ever witnessed in the history of the United Kingdom.

In this episode, with Chartered Financial Adviser Lisa Conway-Hughes, we talk about vital strategies for navigating this complex and emotional process, covering topics such as protecting your financial future, maximising savings allowances, securing insurance, and safeguarding against scams. We also explore the personal dynamics of inheritance, including factors that influence distribution decisions, such as close relationships, financial needs, and caregiving responsibilities.

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THE significance of inheriting money

• Inheritance comes with a huge responsibility. The more you inherit sometimes the more extreme those emotions can be.

• You need to take a moment. Whichever situation is your natural reaction - just take a moment and first of all, get some perspective. How life-changing is it actually going to be?

• There are examples of people inheriting a lot of money and simply going on spending sprees.

• On the other end of the spectrum, people who inherit a lot of money or are given a lot of money from their families can feel a huge burden because it is not something they've necessarily earned themselves.

• This can come with a lot of guilt and a lot of those people's initial reaction is to ignore it, to just pretend it's not there, keep it in cash, and not take responsibility for it.

• We need to address what our natural reaction is — why we are reacting in that way, and then get help from a financial advisor to help you get that perspective.

• If, let's say you are planning on getting the money you are inheriting from your parents, you've got to plan in a financial worst-case scenario.

• What if they are in a care home for five years, for 10 years and it's 75 grand a year? Would there actually be any money left at the end of the day? Also, have you actually spoken to your parents about their financial situation? Do you really understand it? Because if you are basing your own personal financial planning on a guesstimate, that's not, it's not a good way to plan.

• If in doubt, ignore the inheritance to start with and see it as a bonus rather than something that's necessarily going to happen.

• As a general rule of thumb, let's say if you're thinking, ‘oh, I don't need to do any pension planning or retirement planning as such because I'll have an inheritance’. Firstly, you need to think about life expectancy. How old are your parents and what's the difference in age? If your parents are gonna live till 90, but they had you in their twenties, you are going to be in your late sixties before you even inherit anything.

• For every £10,000 you want to spend a year in retirement, you need £250,000 in your savings, your investments pot, and your pensions.

• It's about getting some realistic numbers, maybe putting together a plan for you to see what your shortfall is, and putting it into context to start.

having the inheritance conversation

• The conversation is uncomfortable for the person talking about it, and it's uncomfortable for the person who is the parent or the person potentially giving the inheritance at some stage.

• It starts with, if you were to die or to get dementia or be incapacitated in any way, have you got a power of attorney? Have you got a will? Where are they kept? If you were to die, how would you find out where things are? If you've got two parents, how would you help the other remaining parent to stay organized and to keep on top of things?

• Financial advisers have different qualifications and one of them is called the step qualification, and it's an estate planning qualification. You would want to look out for someone who's got that qualification.

managing the money

• The inheritance tax manuals are thick. The core essential bit of information that you need to know is everyone is allowed to have £325,000 of assets tax-free.

• If you are married, that would be £650,000 between you. Say we've got a traditional mum and dad, the dad dies first, the mum would then inherit the £325,000 allowance from the dad. Then on the mum’s death, the second death, £650,000 would be tax-free. If your home is worth more than that, and it's your principal residence, and it's going to go to direct relatives, then you are actually allowed a £500,000 allowance each.

• Anything above that is going to be taxable at 40%, so make the most of your gift allowances.

• You can also gift without any inheritance tax consequences. That's really important, especially for people who've got final salary pension schemes where their parents are getting good money coming in, they're not spending it all and they're actually accumulating it. You can gift that disposable income. So as long as you can prove what your incomes were, what your outgoings were, and that you're not depriving yourself, gifting out of disposable income is an excellent thing.

• You could also think about the next generations and what are they actually going to need. It’s a very common thing to gift for disposable income on things like school fees. So could you contribute towards any school fees planning out of disposable income for grandchildren, for great-grandchildren, for example. You could be doing some pension planning, believe it or not, for your grandchildren, because even babies can have a pension.

• There are lots of bits you can be doing, but it's about starting off with what you want to achieve.

• If you receive a lump sum of money, don't do anything straight away. Put this money in a cash account. You never want to have more than £85,000 with any one bank because if that bank goes bust, you've got an £85,000 insurance policy by the government. If it's a joint account, it's £170,000.

• There is this thing called the temporary high balances allowance, which means you can have you're protected up to a million pounds.

• Put the money somewhere safe, somewhere that is protected. Then it's about taking a step back and thinking about what it is that you want to achieve.

• Create a lifetime cash flow model where we work out where is the need in your life and where would the ideal allocation be to this pot?

• Essentially, you are always goint to have a cash buffer, but if your needs are in the medium to long term, then you don't need to keep it all in cash.

• You could be using the lump sum to contribute excess into your pension to then reduce yourself down into the tax bracket.

• Say you were earning £70,000 a year, and used £20,000 a year of my inheritance to put into a pension. Then you’re going to get yourself back to being a basic rate taxpayer. You can use the inheritance as well to help you control your tax bracket and then the majority of the money is going to go in the medium term

• With high interest rates, paying some of your mortgage down could be helpful as well. For most people, it's probably doing a little bit of everything, but a financial advisor will be able to help you work out in what proportions are going to be right for you.

• Remember that you have to pay the tax before the money gets given to you. You take out something called a whole-of-life insurance policy, which means that if you're insuring a couple, it's joint life second death.

• The benefit of insuring against this inheritance tax risk is that as the parents pay the insurance for the inheritance tax, so it's reducing the amount that they have in their estate. The kids will receive the money from the insurance, then they pay the inheritance tax bill, and then the money is released. It’s a really nice, clean, simple way of doing it. Lots of people can get themselves into all sorts of tangles and knots when it comes to setting up trusts and things like that, but trusts can be very expensive.

• With inheritance, it’s important to know how to manage it. It can feel like a real burden and people are frozen into inaction because of the weight of the responsibility. If you don't have the confidence to do it yourself, find someone to help you take a step back and really get to know you to understand what would make you happy.

• Aligning those goals and those investments with your goals will bring you greater satisfaction. It’s about finding the balance that works well for you.

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LISA CONWAY-HUGHES

Lisa Conway-Hughes is a Chartered Financial Planner and a Fellow of The Personal Finance Society. Lisa joined the financial industry 16 years ago and in October 2020 was voted Financial Adviser of the Year and Marketing Influencer of the Year – London by Professional Adviser Magazine – WIFA. Lisa, also known as Miss Lolly, writes, speaks, tweets, and blogs on all things money related. Lisa is passionate about making financial education open to all and loves taking the jargon out of the financial world.