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Should you rely on an inheritance to fund your retirement?

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Did you know that the ONS found that the average inheritance across the UK is about £11,000?

The figure jumps to an average of £33,000 for those receiving an inheritance between ages 55-64, but those aged 16-34 tend to get between £4,000 and £5,000.

The precise amount you get varies quite widely, largely depending on your family wealth. Naturally, the more wealth there is to speak of, the more you are likely to get.

This means that for some people, an inheritance can suddenly transform their lives. Perhaps you and your family are getting along alright financially, but an unexpected inheritance lets you pay off your mortgage and put a comfortable nest egg aside for your retirement.

Such cases do happen, but they are generally quite few and far between when you look at the bigger picture. Yet as many as one-sixth of Britons are counting on an inheritance (instead of a pension) to largely fund their retirement one day.

As independent financial advisers here in Grantham and across Lincolnshire, we often talk to clients about how a future inheritance should feature in their financial plan. Should it form a central pillar which you largely rely on? Should it be more of a backup option?

Let’s take a closer look at how inheritance might feature in retirement planning:

Factoring in long term care

If you are thinking about relying on an inheritance to fund your “life after work”, then most people need to take some important risks into account.

One of these risks concerns your parents’ “end of life expenses”. Unfortunately, none of us knows what is going to happen in, say, twenty years when our parents could be very advanced in age. It is quite possible that one or both of them might need to go into care – which can get very expensive, and rapidly drain your inheritance.

Care home costs can be particularly detrimental to a family’s wealth. In 2017-18, for instance, the average price for a residential care home in the UK was £32,344.

When you spread that across ten years, that’s a total cost of £323,440. Indeed, it isn’t unusual for many people to sell their home in such circumstances to fund their care costs.

If your parents are already gone and you are in the process of sorting through their estate, then the above scenario clearly is less relevant to your situation. However, if your parents are alive and you are awaiting a future inheritance, then you do need to factor in this possible future.

Other potential inheritance drains

Even if your parents do not one day go into long term care, you need to consider other potential outcomes which might reduce your inheritance. For instance, many older people are using their retirement wealth to check items off their bucket list, such as travelling the world and taking multiple long-haul flights per year.

For most people, it is therefore important to eventually have the “inheritance conversation” with your parents at some point, to help ensure that everyone is on the same page. Otherwise, you risk making some dangerous assumptions which might not transpire.

For instance, some parents do not explicitly promise their children an inheritance. In these situations, it isn’t uncommon for the latter to assume they will receive their parents’ wealth one day, when in fact their parents’ top priority is to enjoy their wealth and look after themselves – even if that leaves no money for their offspring!

So ideally, there needs to be clear communication between the generations about inheritance. Even then, however, in cases of clarity and agreement things do not always turn out as planned and an inheritance can be drained by:

  • A large future bill for long term care.
  • Future parental divorce and remarriage, which reduces/diverts the inheritance.
  • Unanticipated parental debt(s) which your inheritance needs to help cover.
  • An unexpected inheritance tax bill.

You also need to consider how your parents’ wealth will one day be split between you and your siblings. Naturally, if you are an only child then you are more likely to receive a bigger inheritance than someone looking at the same inheritance amount but has siblings.

Finally, you should also factor in your parents’ trust arrangements.

Many retired people these days do not simply “hand over” an inheritance to their beneficiaries, with no strings attached. Instead, they can opt to put their wealth into a trust, which restricts how and when you can receive the money – as well as what it can be used for (e.g. a house deposit).

So, is it all bad?

You have probably noticed that we are generally quite negative towards the idea of relying on an inheritance to fund your future retirement! On balance, this is a risky strategy as it puts all of your eggs into one basket.

Is there a positive place for an inheritance in your retirement plan? Yes, there certainly is. Receiving an inheritance can give your existing financial plan a big boost.

For instance, it could help you pay off your mortgage maybe ten years earlier than originally planned, therefore freeing up a huge amount of your monthly income to spend on some luxury/leisure items (e.g. holidays) or to put towards your pension.

In many cases, when it comes to financial planning it can actually be healthy to behave as if you are not going to receive an inheritance one day. That way, your plan is not seriously hurt if events do not play out as you hoped. If they do, then you get a welcome boost.