I suspect that most people head towards retirement armed with at least some basic ideas of what they would like to do when the moment to call time on their formal working life finally arrives.
Admittedly, very few folks approach a return to a workless life, following six decades or more of hard graft, having created a detailed, day-to-day spreadsheet outlining their forthcoming retirement activities and a host of other plans. After all, retirement is a time to relax, to consider and to embark on projects you never, or rarely, had time for when a large part of life was spent at work.
And while it’s virtually impossible (and a tad excessive) to plan our retirement to the n’th degree, post-work preparations will inevitably focus on a handful of ambitions which this fresh allocation of spare time enables us to fulfil.
Holidays, often the grander the better, feature prominently on many planning lists. Indeed, this area of planning is something of a moveable feast as I discovered last week after reading that the InterRail pass, beloved by students of the 1970s, was becoming increasingly popular with the over 60s, enabling a massive, grey-haired cohort to travel across Europe at their leisure.
It appears that you must only take the Eurostar from London to Lille or Paris and the continent is at your feet. This has enormous appeal if, like me, you’ve grown a little tired of the faff associated with flying. Checking in at 4.30am for your early morning, no-frills flight before contending with insufficient legroom and indifferent, microwaved food is usually followed by the questionable joy of collecting your hire car while a guy at the rental desk desperately tries to sell insurance cover as you counter by explaining that you’re already covered. The contrast with slower-paced rail travel couldn’t be greater or more attractive.
Staying with the planning theme, it’s become worryingly evident that if you have a house, a pension or other assets, you should also spend time planning your retirement finances.
Over the past few weeks, farmers across the land have protested against the unwarranted extension of Inheritance Tax (IHT) which will hit them hard and, in all probability, eventually reduce the acreage of land being farmed, effectively compromising the nation’s food security. But the IHT tentacles reach much farther beyond the farming community after chancellor Rachel Reeves extended the IHT threshold freeze, potentially making hundreds of thousands more people liable to pay it.
According to one credible report, the number of people incurring an IHT liability could be as high as 1.9 million by the end of the decade.
IHT, or death duty as the tax is also known, has been around in various guises for more than two centuries. In 1796, the duty was first levied on estates to help fund the war against Napoleon; almost a century later, in 1894, death duties were formalised and levied at 8%. By the end of World War Two, the tax had risen to 65%; under Atlee’s post-war government, it reached 80% in 1949. Today, the charge is 40%.
When delivering her first Budget at the end of October, the chancellor suggested that only 6% of estates would be liable for IHT this year. Even after subjecting private pensions to death duty, she maintained that the figure would not exceed 10% by 2030.
The Office for Budget Responsibility estimate that, once future taxes on private pensions are taken into account, more than 300,000 estates will have to pay IHT over the next six years. But the scale of this particular tax grab could be significantly greater, leaving an estimated 1.9 million people worse off.
Why the discrepancy?
Detailed analysis published by the Daily Telegraph delves deep into population statistics and concludes that during the current tax year the number of people liable for the tax will rise to 238,000. Changes to tax rules governing private pensions, due to be introduced in April 2027, will see that figure increasing to 356,000. Later in the decade, the impact of the IHT threshold freeze will also be felt, with around 400,000 affected by 2029.
Between 2024-30, the number of descendants who will be subject to death duties following the death of a family member is expected to reach almost 1.9 million. It’s a sobering statistic which reinforces the widespread belief that IHT is no longer a tax limited solely to ‘the rich’.
It follows that for those heading towards, or already in, retirement and currently mulling over the difficult choice between a summer spent InterRailing or one which involves flying further afield, caution is advocated, especially if they have managed to accumulate a moderate amount of assets or have an equally modest private pension.
Over the course of our working lives, we accumulate wealth which we quite understandably want to pass on to our children, grandchildren and other loved ones. This accumulation of assets has, in almost every instance, taken time and effort – and has been achieved while paying tax in numerous guises.
Perhaps the most valuable asset most of us own is our home; if so, it will almost certainly represent the largest percentage of our estate when we die. Failing to plan for such a scenario could prove extremely costly for our descendants. Fortunately, however, equity release offers older homeowners two potentially attractive opportunities: firstly to withdraw a proportion of the equity within their home as a tax-free lump sum and secondly, to reduce the value of their estate, thereby reducing any prospective IHT liability.
This latter benefit is most popularly achieved by using a lifetime mortgage, a loan secured against the homeowners’ property, which effectively reduces the estate’s value. The lifetime mortgage is repaid when the homeowner(s) die or move into long-term residential care and the property is sold.
Of course, the benefits outlined above will ultimately have an impact upon the percentage of the property’s value passed on to family members or other loved ones. However, homeowners may also have the opportunity to make use of inheritance protection, effectively ring-fencing a specific percentage of their property’s value to be passed on after they die.
Clearly, retirement planning is not all about checking flight or InterRail timetables. Those carving the time out to plan their post-work finances could enjoy a number of advantages from which their descendants could also benefit.
Footnote
It’s also worth noting that there are currently two allowances which can further reduce death duty liabilities. First is the Inheritance Tax Residence Nil Rate Band (RNRB), a transferable allowance available to married couples and civil partners when their main residence is inherited by direct descendants, such as their children or grandchildren.
Second, the residence nil rate band is available with a maximum allowance of up to £175,000 per person. If it remains unused, this allowance can be transferred to a surviving spouse or partner. It is in addition to the existing £325,000 Inheritance Tax (IHT) nil-rate band.
Combining these two allowances enables married couples and civil partners to pass on property valued up to £1 million to their direct descendants free of IHT.
