My wife and I are both 66 years old, in good health and have just started receiving our full state pensions. Although none of us can predict the future, both our sets of parents lived past 86 years, so I’m trying to plan for what might be another 20 years.
We would like to start saving in order to leave an inheritance for our daughter, grandchildren, nephews and nieces.
We can easily afford to save £1,000 per month between us from our pension incomes without having any negative effect on our lifestyle.
If we do manage to live for 20 years and save £1,000 per month, that could mean a total inheritance of £240,000.
Care costs: Those who have more than £23,250 in savings are required to fund their own care
My concern is that I could save all this money and then the majority of it would be taken from us if either myself, my wife, or both needed a care home in later years.
Instead of us saving our money into one of own savings accounts, can we save it every month directly into my daughter’s savings account, for her simply to share out according to our instructions when we’re gone?
We understand that the money will always legally be hers, but that way I wouldn’t have money to declare if ever the care home situation arose. P.T
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Harvey Dorset, of This is Money, replies: Being able to save £1,000 per month for a possible 20 years does mean that you could build a considerable pot.
Unfortunately, you are also correct to say that much of this money could be at risk further down the line.
You raise the issue of whether the money could be taken if you or your wife need care later in your lives.
Currently, those with more than £23,250 saved are required to fund the cost of care themselves.
There is also the issue of inheritance tax, which your family may need to pay when they receive the money.
Inheritance tax is charged at 40 per cent over a threshold of £325,000 per individual, giving a total of £650,000 between you. That tax-free threshold can be raised up to £1million for a couple, with an additional £175,000 allowance each to cover passing on your main home to direct descendants.
Only around 4 per cent of estates are liable for inheritance tax. However, if you have a higher value home, a decent amount in savings and investments and additionally accrued this large cash sum, there is a chance yours could end up being one of them.
Outside of a tax-free Isa, tax on savings interest, or capital gains tax or dividend tax on investments, mean the amount handed over to the taxman could rise further.
As a result of this, you are wise to consider what options are available to you to pass as much of this money on to your children as possible.
There are a number of ways to go about this, and the route you go down will depend on the access you need to the money in the meantime, as well as your future needs.
There are limits on how much you can give away each year without it potentially becoming liable for inheritance tax, the main one being a £3,000 annual gifting allowance.
The seven-year gifting rule means gifts of more than £3,000 would not be subject to inheritance tax if you live for seven years after the gift was made.
Hand over the money gradually and you can take advantage of your combined £6,000 limit for half of the £12,000 annually.
This is Money spoke to two financial advisers to find out the best way for you to pass this money on to your family.
Tax relief: Pault Crossan says your beneficiaries could save the money into a pension to benefit from tax relief
Paul Crossan, senior financial planner at Hargreaves Lansdown, replies: First and foremost, you must ensure you will have enough savings and income so as not to jeopardise your own longer term future security and peace of mind before considering gifting.
People are living longer today, and many people underestimate how long they may live so planning at least 10 years beyond normal life expectancy is a good rule of thumb.
According to the Office of National Statistics, the average normal life expectancy for a 66-year-old is 85 for a male and 87 for a female.
If, after this, you still feel £1,000 per month is surplus to your own needs, you could consider gifting it to family instead of saving it yourselves.
This may have various benefits. Primarily, happy family members who will receive a tax-free gift if they live in the UK.
If the money gifted is derived from pension income as you suggest then the gift could also be inheritance tax-efficient if set up correctly.
If the gift from pension income is made regularly and does not reduce your usual standard of living, then it may qualify for the regular income exemption.
Depending on your estate’s situation, gifting £1,000 per month over 20 years could save you potentially up to £96,000 in tax.
This is an area a financial planner or tax adviser would be able to help more with, as there are certain conditions that need to be met.
Where to save the money?
Depending on your family members’ own personal situations, your family could consider tax-efficient savings vehicles with any gift.
This would include, for instance, Junior Isas for the younger children and Isas for those over 18. Isas allow any money to grow without income tax, and investment (stocks and shares) Isas can also grow without capital gains tax.
Cash Isas can be great for short and medium-term savings and investment Isas generally suit those prepared to accept market risk over the medium to longer term.
However, Isas come with a potential drawback, in that the individual receiving the money can access it immediately (or on reaching age 18 in the case of a Junior Isa) to spend as they wish.
If you wanted the money to be used to help your grandchildren buy a home, for example, this may not be the best place for it.
For longer-term savings, your family members could also consider paying the money in as pension contributions.
Final salary pensions for today’s generations are rare, and so forming a pension saving habit at an early age would be a valuable gift to give to your family, particularly those just entering the world of work.
The great news for pension savers is HMRC will also add tax relief to any pension contributions.
> How pensions work: Your guide to saving for retirement
Usually, 20 per cent tax relief is credited soon after the initial contribution and further tax relief may also be available if those receiving the contribution are higher and or additional rate taxpayers.
There are limits to how much you can pay into a pension and obtain tax relief on, and this will vary for each individual.
Even those not working, including children, can still save up to £2,880 net over a year into a pension. This means £2,880 will increase to £3,600 once the Government adds £720 of tax relief to their pension.
The trade-off for this tax relief is that pensions are a long-term savings plan, which cannot be accessed until the point of retirement.
Currently, the earliest most people can access a pension is age 55, with this due to increase to age 57 by 2028.
What if you need to go into a care home?
In terms of your concerns about declaring care home needs, provided the local authority do not deem the gift as a deliberate deprivation of their assets, generally speaking there should be no issue.
The local authority would usually have to demonstrate that someone knew they needed care and support when they carried out the gift.
Given you are aged 66 and in good health, they appear not to fall foul of this.
However, the definition of deliberate deprivation is open to interpretation and changes, so it is always worth seeking personal advice on your circumstances.
What are the pitfalls of giving money away
Put yourself first: Luis Amato warns that it is important to consider how much of this money you will require for your own needs
Luis Amato, private client adviser at HFMC Wealth, replies: It’s great to see that you and your wife are thinking ahead, planning not only for your financial future but also for the legacy you wish to leave behind for your daughter, grandchildren, nephews, and nieces.
One of the most important points to address is ensuring that you and your wife maintain financial security for the next 20 years, particularly in case either of you requires long-term care.
With both of your parents living into their late 80s, there’s a strong chance that you may also live a long life.
While none of us can predict exactly how much care we might need in the future, it’s essential to consider that care home fees or in-home care could significantly impact your savings.
In some cases, care home costs can run between £40,000 to £60,000 per year, or even higher depending on the level of care required.
While passing money to your daughter now might seem like a way to avoid funds being counted for care costs, it could leave you short for your own care.
You risk losing access to the money in the event your daughter was ever made bankrupt or divorced
Local authorities assess your financial situation, and if you’ve reduced your assets significantly, it could be seen as ‘deliberate deprivation of assets,’ meaning they might still count the money you gave away. Therefore, professional advice is key.
Additionally, simply putting money into your daughter’s account is unlikely to the best plan for a number of reasons.
By gifting outright, you would lose control of the funds and are relying on your daughter acting in your interest, especially should you ever need the money, which is not guaranteed.
Furthermore, your daughter might have spent it before you need it, and you also risk losing access to the money in the event she was ever made bankrupt or divorced.
It’s vital to maintain enough assets in your own name to ensure you can afford future care without financial worry or reliance on the local authority.
How can they pass on the inheritance safely?
There are several ways to balance saving for your family while protecting your financial future:
Regular gifts out of income: If your pension income covers living costs, you can make regular gifts from excess income. HMRC allows gifts from surplus income without them being subject to inheritance tax, but it’s important to document these properly.
Pensions/junior Isas: Instead of direct gifts, consider contributing to your family’s future through their pensions or Junior Isas.
Trust planning: Trusts can help protect assets from being used for care home fees while passing wealth to your family.
A discretionary trust could be established to receive your monthly savings, but trusts come with tax implications and administrative responsibilities. Therefore, ongoing professional support may be required.
Life insurance: Life insurance can leave a lump sum for your family, preserving your estate, though you’d need to maintain premium payments throughout your lifetime.
It’s important to ensure you don’t inadvertently put yourself in a position where you might lack the funds for your own future care.
By carefully considering the above options, you can achieve a balance between protecting your own financial security and passing on wealth to your loved ones.
Before taking any action, it’s always advisable to consult with a financial planner who can help guide you through the best options based on your individual circumstances, helping you structure your savings and gifts in a way that meets both your current and future needs.
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