Leaving a legacy

For many clients, leaving a legacy for their loved ones could be a key objective. If this is the case and the client does not use all of their assets for income during retirement, the treatment of different assets can maximise any legacy. 

For example:

• Pensions. For drawdown clients, whatever remains in the fund on death can be distributed free of tax on death before age 75. Death benefits from an annuity are treated similarly.
• Savings and investments. Assets from an ISA can effectively be passed tax-free to a spouse or civil partner, though when both die the funds can’t be passed to anyone else tax-free.
• Equity in the home. In 2022 to 2023, the additional main residence nil-rate band of £175,000 can be used when a residence is passed to a direct descendant on estates worth under £2 million. For clients with a total estate worth more than £2 million, the extra allowance tapers off, falling by £1 for each £2 above the threshold.

Potentially exempt transfers

With more people living into their 90s, the average age to receive an inheritance is now 61, so children could be in their 50s or 60s at the point when their parents die. At these ages, they are likely to be financially settled. A ‘living inheritance’ gifted at a younger age could be more valuable. Any equity released from the home is tax-free and could be used to make a potentially exempt transfer and under current legislation, it’s free of Inheritance Tax if the donor survives for seven years after making the gift.

Don’t dismiss annuities

The traditional view of annuities been that they’re inefficient as a means of transferring wealth on death. That’s no longer the case. There are a number of ways annuities can provide financial support on death:

• Guaranteed periods were limited to a 5 or 10 year guarantee, but now guaranteed periods up to 30 years are offered.
• Value protection can be used to protect the full value of the annuity or just a proportion of it.
• Beneficiaries’ pensions can now be paid to any beneficiary on death. 

What's more, research conducted by Milliman in 2018 how death benefits over the long term can often be higher if, instead of using a mix of bonds and equities, the bond element of a drawdown portfolio is replaced with a lifetime annuity.

Your client’s objectives

Leaving a legacy may not be your client’s only concern, they may have multiple objectives.

This could prove challenging for you as their adviser, but a holistic approach to retirement planning could support this. There are many ways to use and layer together solutions to help achieve a variety of client objectives, including maximising any legacy.