A recent study reported by International Adviser reveals that many people who were hoping to leave a substantial inheritance to their children may have their plans affected because of high rates of inflation.

The report confirms that 62% of those planning to pass on wealth are worried about inflation reducing the amount they will be able to give to loved ones. 

The increase in living costs driven by rising prices means money previously earmarked as a legacy may have to be used to cover future spending, with care fees a particular concern. 

Further concern has been prompted by the freezing of the Inheritance Tax (IHT) nil-rate threshold of £325,000 until at least 2028. This has resulted in many more estates anticipating an IHT bill. 

Such uncertainty is also affecting people hoping to inherit, particularly if an assumption of a legacy is a key part of their financial planning. 

Indeed, This is Money reports that of those expecting to receive an inheritance, 40% are depending upon such money to safeguard their future finances.

There are substantial sums of money at stake. Indeed, Barclays have estimated that as much as £5.5 trillion of wealth will be passed down from the baby boomer generation to their beneficiaries, either gifted or as inheritance.

If you are concerned about how issues such as inflation and IHT could affect your legacy plans, read about some possible ways to help preserve the value of your wealth.

1. Improve your potential returns by investing rather than saving

One effective way to offset the loss of purchasing power on your money caused by inflation, is to maximise the returns you get on your assets.

Increasing the amount you invest, and keeping cash savings to a minimum, could be a good step towards this. 

The interest rate you enjoy on a savings account is likely to be less than the rate of inflation, whereas investing has often been shown to be able to produce inflation-beating returns in the long term. 

Two important exceptions to this are your emergency fund, and money you will want to access within five years. Both of these should generally be held in savings, rather than invested. 

2. Consider taking on more investment risk 

As well as investing more, you could also review how your money is invested. 

You can increase the potential for better returns by taking on more investment risk, although it is important to be aware than more risk means an increased chance of short-term market volatility affecting the value of your holdings and the potential for a larger loss.

It is also important to look to invest for as long as you can, and resist the temptation to continually meddle with your portfolio.

There is a good reason why “time in the market, not timing the market” is one of the best known investment sayings. 

The underlying message behind it is that the longer your money stays invested, the longer you have to smooth out potential losses through market upheaval.

3. Make sure you are maximising your tax efficiency

While inflation can reduce the purchasing power of your money, taxation will reduce the actual net value.

This makes it all-the-more important to make the most of the tax incentives and tax-efficient savings vehicles that are available to you. 

Pensions are a highly tax-efficient way to save money. Provided that you do not exceed the pension Annual Allowance (the lower of £60,000 or 100% of your earnings in 2023/24), you will receive basic-rate relief on all contributions.

So, for every £80 you invest, an extra £20 will automatically be added. That is the equivalent of 25% growth on your money without you having to do anything.

You can then claim higher rates of tax relief through your self-assessment tax return if you are eligible to do so as a higher, or additional-rate taxpayer.

Also, remember that your pension fund will not usually be subject to IHT on your death. Furthermore, as we discussed in a previous article, the recent reduction of the Lifetime Allowance (LTA) charge to 0% means you can now accrue an unlimited amount in your pension fund without it being liable to a tax charge on top of any Income Tax you will pay when you come to withdraw it.

ISAs are another tax-efficient savings option. Any interest you receive or profits you make are exempt from Income Tax or Capital Gains Tax (CGT). So, it may be worth looking to make the most of your annual ISA allowance (£20,000 in 2023/24). 

You should be aware, however, that ISAs will be seen as part of your estate for IHT purposes. So, you may want to consider using them for income purposes in retirement before accessing your pension fund. 

4. Take proactive steps to reduce your IHT liability

If you are concerned about inflation reducing the value of your legacy, you should take steps to minimise your IHT liability with some straightforward estate planning steps.

Passing on wealth to the next generation can be hugely beneficial, but it requires careful planning.

According to IFA Magazine, IHT receipts were a record £7.1 billion in the 2022/23 tax year. Additionally, according to Professional Adviser, the Office for Budget Responsibility latest forecasts suggest that figure could rise to as much as £8.4 billion by 2027/28, as more estates get caught by the frozen thresholds.

There are some perfectly legitimate ways of reducing your IHT liability, for example through the use of gifting, charitable donations, and putting assets in trust. 

We would strongly recommend you take advice from an expert, as mistakes can be costly and may leave your loved ones facing an unexpected and unwelcome tax bill if estate planning measures are not set up correctly.

Remember that you should think about your lifestyle and health 

One important thing to remember is that, however frustrating it may be to find you are unable to leave wealth to future generations, your own financial wellbeing should always be your priority.

Your health and quality of life are all-important, particularly once you have stopped working and are living on your retirement savings. 

Experts are predicting inflation will fall sharply before the end of 2023. So, you may want to consider delaying any drastic steps that could impinge on your quality of life until the future economic outlook is more certain.

Get in touch

If you would like to find out how to protect your wealth from the eroding effects of inflation, or mitigate a potential IHT bill on your estate, please do get in touch with us at DBL Asset Management.

Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.

Please note

Until Royal Assent is received, the Budget proposals are not yet law and so could be subject to change.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. 

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.