Sorting your pension, FAQs on inheritance tax - and maybe an ISA for the grandkids?
1. Just the facts
You have grandkids to spoil and your own kids aren’t out of the financial woods yet. You might have a bit of tax planning to do and the word ‘downsizing’ may have entered your head once or twice.
We won’t patronise you with naff pictures of hand-holding retirees on cruise ships. Just the facts on inheritance tax, retirement incomes, Junior ISAs and more – with a liberal dash of practicality.
The only two certainties are death and taxes and the hated inheritance tax lumps these both together. More complex than ever, we can now each leave £325,000 tax-free, rising to £475,000 if that includes your family home.
Your spouse or civil partner doesn’t pay inheritance tax on the assets you leave them. If you leave a pension and die before you’re 75 – that’s tax free too. After 75 – your heir pays tax on this at their income tax rate. Do if you haven’t – it can help plan around any unnecessary inheritance tax.
1. Key Facts
If you leave money, property, works of art, or pretty much anything that’s worth something, to your relatives when you die, there is a chance that they will have to pay inheritance tax on that legacy. Once seen as a tax only for the wealthy, the housing boom has seen more and more people fall into the inheritance tax net.
At its most basic, it is payable on all estates worth more than £325,000. It is payable at 40%, charged on the amount over and above the threshold.
So far so easy, but there are all sorts of exceptions.
So for example:
If you as a single person leave behind assets to kids worth £500,000 (assuming you only have one property);
Your estate pays nothing on the first £450,000, and 40% on the remaining £50,000 – that’s a total of £20,000 in tax – assuming you’re not leaving anything to charity.
Don’t think you can give all your property away on your death bed. HMRC is wise to this. You can give assets away, but then have to survive a full seven years for them to fall out of your estate.
That said, there are limits: anything considered a ‘normal gift out of income’ (i.e not your house) is exempt, and anything up to £3,000 a year.
So if you’re a youthful grandparent, generously minded and you can afford to, you might want to get gifting! It’s not a straightforward area.
And if you’re not married (this all gets very 19th century here) do read up on what this means – it depends on whether you own the property as joint tenants or tenants in common and whether you have a will.
We think of your total income in retirement as three different ‘shots’ which get mixed together to make the total. This short Guide will help you to work out a rough estimate of how much you will be able to chuck into each glass – and how strong your cocktail will be. Hic.
1. The First Shot
My State Pension: These are funded from National Insurance (NI) contributions and are intended to ensure we all have a basic amount of money to support us in our old age. The new State Pension is currently £175.20 a week BUT you’ll get nada if you haven’t got at least 10 years of NI contributions under your belt from working (or the relevant ‘credits’ from periods of illness of unemployment.)
Don’t panic – if you are over 55 you can now go online to check your state pension statement. The pension statement will give you an estimate of how much you may receive under the new State Pension based on your current National Insurance record.
2. The Second Shot
My Workplace Pension (from your boss): From this year you have to put in at least 5% of your salary (or ‘qualifying earnings’ which for the 2020/21 tax year is between £6,240 and £50,000 a year). The Government will bung in an extra 1% and your employer has to put in at least 3%. So that’s 8% which will be building up, month after month. The more you earn, the more you will save. You can refuse to take part (“opt out”), but it’s not a great idea because you’ll forfeit the 3% from your employer and 1% from the government.
If you have a final salary scheme, be really careful before moving it or fiddling. Some of these guarantees are like hen’s teeth these days and you will be worse off if you move it.
3. The Third Shot
A Private Pension – (from you): These are pensions which you set up by yourself – a bit like you would an ISA, or buying insurance online yourself. You choose the pension and you choose how much you can afford to put away each month. If you’re about 40 and save £25 a month, you could save a stash of about £21,000 by your retirement age. Assuming you take no tax-free cash, this would give you a pension of about £24 a week. This might all sound horribly boring BUT, if you’re a basic rate tax payer, for every £80 you put in, the Government will top it up with another £20. That’s free money. Higher rate tax payers can claim back even more – another £20 come tax return time. Interested? See who we rate on our Compare pages.
Junior ISAs: For Grandkids
Junior ISAs are just as flexible as a normal ISA. Investors can invest in range of underlying investments, including cash, the stock market and government bonds. The temptation – because it is for your children and we spend our lives trying to keep them away from risk – is to play it safe and to keep it all in cash. However, if your kids are 13 or under, which by definition means that you are saving for at least 5 more years, you can afford to take a little more risk with children’s savings because you have time to ride out the highs and lows of markets.
All children residing in the UK are eligible for a Junior ISA. Anyone - parents, grandparents, generous godparents - can contribute up to the annual allowance of £9,000 for this tax year. It automatically converts to an adult ISA at age 18. These are not for knickerbocker-wearing brats only. Just £1 a day is enough to get saving.
Our children’s JISAs are in fairly spicy things like emerging market shares – pretty hard core stuff but we have a very long time frame to play with. Over an 18 year time period, shares are 99% more likely to do better than cash. Over 10 years? 75%. OK that’s based on rear-view mirror stuff and not a crystal ball.
But ask yourself if your nervousness about markets is preventing your money from working as hard as it should be? As always, no-one can guarantee that stock markets won't fall. We just have to work on the balance of probability.
If you want a cash JISA do shop around online for the best rates. JISA rates are typically better than your average savings account rates.
If you are interested in a stocks and shares JISA then look at our Best Buys table to see who we rate and why. Rates are correct as of 2019 and the links are in the ‘Your Options’ section of this learning path.
Inheritance Tax - The one we all hate
The only two certainties are death and taxes and the hated inheritance tax lumps these both together. More complex than ever, we can now each leave £325,000 tax-free, rising to £475,000 if that includes leaving the family home to direct descendants.
Your spouse or civil partner doesn’t pay inheritance tax on the assets you leave them. If you leave a defined contribution pension and die before you’re 75 – that’s tax-free too. Defined benefit pensions are paid out once the retirement age set by the employer is reached, so there isn’t a lump sum to ‘inherit’, as such. After 75, your heir pays tax on your assets at their income tax rate. Managing this will require help, and a will, and we can help with both of those.
Junior ISAs - Better than plastic tat for birthdays?
Junior ISAs are largely tax-free accounts which can give kids a nice lump sum when they turn 18 to help them for uni fees or a first flat. Although the parent or main carer will need to set this up, once done you can pay in on an ad hoc or regular basis.
All children residing in the UK are eligible for a Junior ISA. The maximum annual allowance is £9,000 per grandchild for this tax year. It automatically converts to an adult ISA at age 18. Just £1 a day is enough to get saving.
Pension and Income – how to manage them
Many people in retirement are interested in using investments to generate an income. This can be inside a pension or indeed in another account such as an ISA. Remember that money in a pension is also free from inheritance tax.
Some good income funds pay out about 3% to 4% a year and we’ll share a few which are generally given the thumbs-up.
If you’d like to learn more about downsizing and whether it’s right for you, click here.
For more information about your pensions cocktail including a ‘back of the fag packet’ calculation on what you can expect to retire on, click here.