3 crucial things to consider if you are relying on an inheritance to fund your retirement

Research shows 2 in 5 people are relying on an inheritance to fund their retirement. Find how these circumstances could affect you and your loved ones.

If you are approaching retirement age, it is likely that you are thinking seriously about your financial circumstances. You might already be discussing your retirement prospects with your financial planner, aligning your goals with your financial viability in preparation for the years to come.

However, it could be that you are relying on certain things to fall into place, in order to live a peaceful and happy retirement. This might include expecting to receive an inheritance at some point during your retirement, which might boost your later-life income and provide you with stability and peace of mind.

Indeed, according to MoneyAge, 2 in 5 people set to receive an inheritance say they are relying on this influx of cash to partially fund their retirement.

While it makes sense to include your prospective inheritance in your financial plan, relying on money that hasn’t arrived yet carries some risk.

Read on to find out three things to consider if you are relying on an inheritance to fund your retirement.

1. You could run your pension pot dry if you are relying on a potential inheritance

Even if you have discussed with your parent how much inheritance you are set to receive, it is impossible to predict when the money might arrive.

When considering when you might receive your inheritance, it is important to remember that life expectancies are increasing. According to the Office for National Statistics (ONS), as of 2020, life expectancy at birth is 79 years for men, and 82.9 years for women. If your parents live to a ripe old age, you may not receive your inheritance until you are in your 70s.

This means that, if you are living under the assumption that you will receive an injection of capital later in life, you could run your pension pot dry if you aren’t careful. In addition, if you retire at 55 or 60, your pension savings may have to last you many years before you receive any inheritance.

So, if you are relying on an inheritance to fund your retirement, it could be beneficial to discuss this with your financial planner. Furthermore, it is important to continue drawing a sustainable retirement income, rather than overspending in anticipation of an inheritance down the line.

2. You could inherit less than you originally thought

While the question of when you will receive your inheritance hangs in the balance, there is also the question of how much you might be given.

As we mentioned earlier, you may have already had this discussion with your parents, and planned according to how much they have promised to pass down.

However, extenuating circumstances can affect how much inheritance is actually given. These might include:

  • Your parents requiring costly healthcare in their later years
  • The cost of living crisis reducing the value of their estate over time
  • Your parents selling their current property in lieu of a smaller one before they pass away
  • Changes in their beneficiary plans, such as additional grandchildren being born in future.

In addition to these factors, it is crucial to consider how Inheritance Tax (IHT) rules might affect the wealth your parents pass down.

In the 2022/23 tax year, beneficiaries usually pay 40% IHT on any inheritance of more than £325,000, or up to £500,000 if you are also inheriting your parent or grandparent’s home.

So, it is essential to factor in IHT when budgeting to receive your inheritance. It is important to note that the government may alter the IHT you pay over time, so it could be constructive to check in with your Kellands financial planner during your annual review.

3. “Giving while living” can keep inheritance uncertainties at bay

If you are banking on receiving an inheritance to fund your retirement lifestyle, this can be stressful at times. The above factors all bring a level of uncertainty to your financial circumstances, which could prevent you from sitting back and enjoying your retirement.

One option you and your parents could explore is that of “giving while living”. This refers to when a benefactor reduces the value of their taxable estate over time by giving cash gifts to beneficiaries while they are still alive.

If your parents or other benefactors are in a position to gift money before they pass, it could make life easier for everyone. Firstly, you may be able to benefit from the financial support now rather than later; in addition, your parents could mitigate the amount of IHT that will be applied to their estate when they die.

For more information on reducing your IHT liability, you can read our insights on passing down an inheritance , or contact your Kellands financial planner for guidance.

Get in touch

If you are relying on an inheritance to fund your retirement, seeking advice could be a great option. Email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.


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