US Edition
Much of financial planning is based on the idea of delayed gratification. Lock your money away today in a pension, Isa or savings account, and you will reap the rewards of tax reliefs and compounding interest.
But “a bird in the hand beats two in the bush” is a better maxim – at least when it comes to those who will, one day, receive an inheritance.
Despite the enormous growth of the Bank of Mum and Dad, many people are still getting the bulk of their inheritance too late for it to make a meaningful difference financially.
Christine Benz, of investment research site Morningstar, argues that the very best savers find it difficult to switch from diligent saving to diligent retirement spending. It’s simply too hard to give up their frugal ways.
They are (quite rightly) proud of ensuring their financial security and worry that they will need vast sums for care at some point down the line. And of course they want to leave money for their children, grandchildren and others. But, in many cases, retirees end up being recklessly conservative.
Ms Benz says a smarter strategy is to give away larger sums at the time when it gives the biggest effect on the recipients, that is, far earlier than typically happens.
In America, to which she is talking, the average age people inherit is 51, far older than most people get on to the property ladder and start raising a family.
In Britain, the wait (for the average millennial at least) is even longer – at 61, according to a 2017 study from the Resolution Foundation.
When it does finally come, the average millennial inheritance is forecast to be the biggest in history. It will certainly be far higher than baby boomers and other older generations themselves received, if they got anything at all. But the fact remains that in many cases inheritance comes too long after many of life’s biggest moments are in the rear view mirror.
Paying off a student loan, for instance, could be life changing.
It’s gone largely under the radar, but the terms of loans taken out this academic year are far worse than what came before.
Loans are now written off after 40 years, rather than 30, meaning many graduates will end up paying 50pc more on the same size loan than under the old system.
Someone on £50,000 a year will pay about £200 a month in student loan repayments, akin to typical commuting costs. Imagine the difference lifting that burden would make.
What’s worse, if large sums are left unspent at death (and are not held in a pension) the taxman takes a 40pc bite in inheritance tax.
Morningstar’s research suggests that a £1m portfolio could easily be worth £3m after 30 years, assuming you take 3.8pc a year in inflation-adjusted withdrawals. No wonder the Treasury has been reaping ever larger sums via death duties, now worth around £7bn a year.
Yes, you could stuff your pension to avoid inheritance tax – if you are confident a future government doesn’t change the rules – but giving away money during your lifetime is the best way to make sure HM Revenue and Customs doesn’t snaffle it.
What’s more, there’s a hell of a lot more enjoyment in helping someone while you are still alive to see it.
Could next month’s Autumn Statement see the end of inheritance tax altogether?
Jeremy Hunt and Rishi Sunak are clearly weighing it up. Just as the retreat on HS2 and climb down on Net Zero targets, this is all to do with the desperation of a party that is desperately looking for red meat to throw to wavering Tory voters.
Whether or not the death duty burden is lifted, the aim should not be leaving as much cash as possible when you pop your clogs. Far better to dish it out now and enjoy the gratitude of those who could really use the money today.
Why you’ve been doing inheritance all wrong
Holding on to hard-earned wealth until the very end serves no one but the taxman