Mr & Mrs J

Situation

Mr & Mrs J are both in their early 70’s, have retired from work and live from the proceeds of their pensions. As they were both in good health, they wanted to ensure that they could pass their estate to their three children and pay as little inheritance tax as possible.

Outcome

Firstly, we needed to establish their current position including their pensions and investments, as well as their assets and property. We also needed to determine what they were taking from their pensions, how they were taking it and what their essential expenditure was.

Once we had reviewed this, we could create a cashflow model to show Mr & Mrs J what their pensions might look like if they continued to move with the markets and what would happen when they were drawing the necessary amounts from them. This showed that based on the statistics and probability, they would be able to live comfortably until aged 100 without running out of money.

One common mistake that they were making though was that they were drawing more money from their pension than they needed to and hence were paying unnecessary tax.

Our recommendations were as follows:

• Mr & Mrs J both had ISAs, we recommended taking money from their pensions up to the nil rate band so they didn’t pay any income tax, and then to take money from their ISAs to supplement the rest of their necessary income.
• In this particular scenario, keeping money in their pension was very efficient for two reasons. Firstly, in the unlikely event they were to die before age 75 the full proceeds would be paid out tax free. Secondly, at whatever age they were to die, under most circumstances all the money within the pensions would not be subject to inheritance tax, as it is outside of their estate.
• To further reduce their estate, we recommended making some gifts (within the legal allowances which we discussed with them) to their children and other family members. We recommended other larger gifts to children which would be free of inheritance tax providing they lived longer then 7 years from that point.
• Both Mr & Mrs J rarely treated themselves to holidays or larger purchases. But because of their financial position we assured them there was plenty for them to spend, so we helped encourage them to book a large holiday with their family which wouldn’t negatively impact their position.

We review their position annually to ensure they can continue to live comfortably and can reduce their inheritance tax liability. If you would like to review either your tax position or look at how you will pass on your estate, then please get in touch. It’s also important to remember that just because you are retired already, does not mean that you cannot change your pension income and how you take it, so speak to us about your options.