It's the money that goes into a pension plan in the earliest years, with the longest time to grow that really makes the difference. Meet my youngest pension clients age four and five.
Thanks to their grandmother, who is paying pension contributions on their behalf, these boys will have a real head start. Whilst they won't be able to access any of the benefits until age 55, if contributions are maintained at the current level there pension funds will be £2,070,000.
They won't have the worry of having to make huge pension contributions in their middle years "to catch up" and there's some great tax advantages to this arrangement too, which benefit the whole family. Let me explain.
Their grandmother, unfortunately widowed, was left financially secure thanks to a number of large life assurance policies and a portfolio of properties generating a secure and increasing income.
As part of the strategy to reduce her estate and ultimately the burden of inheritance tax for the next generation, our grandmother is utilising all the annual gifts and adopting some other strategies. In addition, she is making regular payments as part of her normal expenditure, utilising the fact that third parties can make pension contributions for someone and benefiting from the H.M.R.C. rule that states : " any regular gifts you make out of your after-tax income, not including your capital, are exempt from Inheritance Tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle and include monthly or other regular payments to someone. "
Now another H.M.R.C. rule allows tax relief on pension contributions at 20% for non earners for gross contributions up to £3,600 per annum. In practical terms, our grandmother can make pension contributions of up to £2,880 for each grandchild, each year. A reduction in her estate of £5,760 each year , without reducing her lifestyle . If this continued for at least twenty years, assuming the property portfolio continued to generate rate this would amount to £115,200 leaving her estate and a potential saving of £46,080 in inheritance tax. Our two grandchildren as recipients of the contributions will be entitled to the tax relief at 20% and will receive £3,600 into their pensions each year. By the age off 55 if the contributions are maintained their funds will be £2,070,000.
Having agreed the framework for the pension contributions part of my work, as a financial planner has been completed. The next stage, that of implementation involved, setting timescales, an assessment of the attitude towards investment risk and capacity for loss. Capacity for loss was an easy one, our grandmother wanted to reduce her estate and therefore could afford to lose the money. However, someone had worked hard for that money and it would be wrong to be complacent, indeed our grandmother has a very cautious attitude and if it made sense she would keep all her money in cash deposits. The boys will be benefiting from the gift of pension contributions, therefore it is their attitude towards risk that we must consider. As they are minors we adopted the risk attitude of their father and given his experience of investments and the timescales involved he felt comfortable with taking an adventurous approach.
With this aspect agreed, it was time to research which included the formulation of an asset allocation, selecting appropriate investments , comparing the annual management charges between different products and platforms before making the final recommendation. The investments also included some ethical investments that although equity based and didn't fit with our grandmother's cautious nature, they did fit in with her ethical outlook so that was an added bonus for her.
Extract from HMRC - IHT Manual
HMRC guidance on IHT exempt gifts
Having a few days away during the school holidays gave me the luxury to read a Sunday paper, goodness knows who has the time to read such a wedge of paper. As I still had my financial planner head on, I turned to the money section first.
There on the back page was an interview with Luisa Zissman, the runner up from the 2013 season of the Apprentice. Whilst she's not the usual suspect that I would expect to be commenting on the UK tax system, her simplification of inheritance tax was both succinct and to the point. Quite right.
The Pharaohs made elaborate efforts to take their wealth to the next world but as Howard Carter and all of us know you can't take it with you. We work hard all our lives in our jobs or businesses hoping that our families will benefit, but if our individual estates are over £325K, the current nil rate band or £650K where a spouse or civil partner is utilising the transferable nil rate band, H.M.R.C. could take 40% of the amount over these figures to Inheritance Tax. Ouch!
It has been said that Inheritance Tax is a voluntary tax and there is a well developed advice sector often targeting the high net worth client but there are some simple steps everyone can take, here's three of them.
Keep it in the family.
The Benefits of using a Financial Planner
Whilst reading the blog articles please be aware of the following:
Welcome to the blog curated by Jill Turner. The pages are not intended to give advice, they are just the real life stories from a real life financial planner and the wonderful people I get to meet.
I want the pages to be engaging, informative and purposeful.
The information contained within this blog is based on our understanding of current government proposals and tax
law, both are liable to change in the future.
Jill Turner is a member of the Personal Financial Society