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Why you shouldn’t bank on your inheritance to fund your retirement

We look at five risks of relying on inheritance to fund your retirement, and two tips on how you can counteract them.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Two in five people who have received or expect to receive a significant inheritance are relying on it to help fund their retirement* – but relying on it alone is a dangerous game.  

Here are five risks of relying on inheritance to fund your retirement, and two tips on how you can counteract them.

We hope you find this article helpful, but it isn’t personal advice. If you’re not sure what’s right for you, seek financial advice.

*Opinium survey for HL, April 2021, 673 participants.

1. You don’t know when you’ll receive an inheritance

Even if you receive every penny of the inheritance that you expect, you usually have no idea when it might arrive.

It’s possible that your loved ones could live well into their 90s or beyond, and you could be halfway through your retirement before you inherit any money. The last thing you want is to be waiting for the death of someone close to you so you can be financially stable.

2. Your loved one’s circumstances might change

There are an enormous number of variables that can affect someone’s ability to leave an inheritance. They might want a retirement that’s full of expensive luxury travel or need some form of paid care or living support.

Going into care is more common than you might think. Nearly half a million people live in care homes in the UK. And nursing care can cost around £50,000 a year, which will eat through an inheritance in no time. 

3. The wishes of your loved ones might change

There are plenty of people who change their mind about who they leave money to. For example, there could be changes in their relationships or family circles, their attitude towards inheritance as a whole could switch, or they might want to leave money to charity. All are possible, and common scenarios.

4. You might have it all wrong

Most people like to keep their finances private. If you haven’t discussed inheritance, you might be wrong about your nearest and dearest’s assets. For example, if they’ve used equity release to dip into the value of their home, you could receive less than you expect. Or you might think they have more stashed away than they do. If they’re open to it, it’s important to have these conversations early so you’re not left with any nasty shocks after they’re gone.

5. A large part of your inheritance could be taxed

The amount of inheritance tax paid on the value of an estate could come as something of a surprise. Inheritance tax is normally paid at a rate of 40% on the value of the estate that’s over £325,000. There is an additional allowance of up to £175,000 if the family home is left to direct descendants. Married couples can also inherit each other’s unused allowances.

If you’re imagining an inheritance of £50,000 for example, the taxman could take a 40% bite out of any money you inherit, leaving you with £30,000.


What can you do?

If you don’t want to fall short in retirement, you should consider planning for it without factoring in any potential inheritance. One way to meet your goals could be to pay in more money. Another is to have a robust plan B. This could include downsizing your home, working longer, or working part-time in retirement.

When deciding the next step, a good place to start is calculating how much your current workplace or private pension could pay in retirement by using tools like the HL pension calculator. If you’re not on track to receive the amount of income you think you’ll want or need, the calculator will give you simple tips on ways to boost your pension. Just remember once you pay money into a pension, you can’t usually take it out again until age 55 (rising to 57 form 2028).

If you have a workplace pension, it’s worth speaking to your employer about paying in more, especially as some employers offer to match contributions. That means they’ll pay in whatever you do, up to a certain limit.

For personal contributions, don’t forget the government will usually top up your pension in the form of tax relief, each time you make a payment, until you reach 75. If you can, you might want to consider increasing your pension contributions. Even the smallest amount can really add up over time. Certain limits apply. Tax and pension rules can change, and any benefits depend on individual circumstances.

Find out more about pension contributions

Want a new pension?

You should always check if you’re entitled to the workplace pension offered by your employer. But if you’re already contributing enough to maximise your employer’s contributions, you don’t qualify for the scheme, or you work for yourself, you could consider opening a private pension like the HL Self-Invested Personal Pension (SIPP).

An HL SIPP is for people who want to take control of their retirement savings. You have the freedom to invest exactly where you want to and control how much money goes in and when.

Find out more about the HL SIPP

New Year's cash prize draw - win what you pay in

If you pay into an HL SIPP and/or HL LISA, you could win back up to £3,000. Total new payments made of £100 or more between 1 December 2021 and 23 February 2022 will count towards your potential cash prize. There will be 7 winners of up to £3,000 each.


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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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