A third need an inheritance to pay for retirement – but you can’t bank on it

Sarah Coles, head of personal finance, and Helen Morrissey, head of pensions analysis, at Hargreaves Lansdown, comment on an HL Opinium survey (of 2,000 respondents) that shows a third of people need an inheritance to pay for retirement – but you can’t bank on it.

Key points from survey:

• • Two in five people either expect an inheritance or have already received one (38%).
  • The younger people are, the higher their expectations of inheriting money.
  • A third of people who expect to inherit say they need the money to fund their retirement (34%).
  • Only 54% have completely ruled out needing an inheritance to fund retirement.
  • However, only 29% of people plan to leave an inheritance.

Sarah Coles says:

“We’re banking on an inheritance to fund our retirements, but this is a dangerous mistake.

“Life and relationships are far too complicated to stake our future financial security on.

“It means millions of people could be left high and dry if the plans of their loved ones change.

“It’s impossible to know what lies in store for our loved ones.

“They may decide to throw caution to the wind and spend their savings on the retirement they really want.

“They may need expensive care, which can devour an inheritance.

“They might change their mind about who they leave money to – especially if they start a new relationship.

“It means you could end up inheriting less than you expect – or nothing at all.

“The older we are, the more likely it is that we’ve seen older relatives being forced to spend their savings in later life.

“This could be one reason why the older we are, the less likely we are to have had an inheritance or to be expecting one.

“62% of those aged 55 said there was no inheritance on the cards – compared to 39% of those aged 18-34.

“In some cases, people will be expecting an inheritance that they were never going to get.

“Some 38% of people either expect to receive an inheritance or have already had one, whereas only 29% of people plan to leave anything to their friends or family.

“And while the gap may be closed by those leaving their estate to multiple people, there’s a very good chance that an awful lot of people are expecting inheritances that will never materialise.

“One way this can happen is if your loved one has used equity release to dip into the value of their home.

“We know that homeowners are more likely to plan to leave an inheritance, and that 36% of them do.

“However, if they’ve used equity release, the debt and interest may have rolled up to such an extent that when the property is sold, an unexpectedly significant chunk goes into repaying the equity release company, so there’s little left to leave.

“Depending on their circumstances, the taxman may take a slice too.

“Even if you do inherit, there’s the risk that it might not come at the time you’d ideally like to retire.

“You may be in your 70s by the time of your inheritance, and left with the nightmare of waiting until a loved one passes away before you can afford to stop work.”

Vulnerable groups:

“Some people are particularly reliant on an inheritance to fund retirement – including women (37% compared to 32% of men).

“This may be because they tend to have less in their pension pots after taking time away from work for caring responsibilities and living with lower average wages.

“The percentage of people who need an inheritance to fund retirement peaks in the ‘squeezed middle’ years (35-54) at 41%.

“This includes the years where people are more likely to have a young family, and have seen the damage done to their retirement plans.

“Many of them don’t feel they have time to play catch up with retirement savings, so think they’ll need an inheritance to close the gap.

“Higher earners are also more likely to be relying on an inheritance to fund retirement – 37% of higher rate taxpayers are, compared to30% of basic rate taxpayers.

“This may be because higher earners have got used to a better standard of living – which isn’t going to be covered by their pension – so they realise they need another source of finance.

“If you expect inheritance to play a part in your retirement plans, you cannot rely on it.

“You need to still be able to afford to retire if you get less than expected, it comes later than you initially thought, or you end up without one.”

Helen Morrissey says:

“An inheritance can play a role in retirement planning, but you need to consider it carefully.

“Your essential expenses should be covered regardless of whether or not you get an inheritance. – this can come from a combination of state pension, workplace and personal pensions as well as any other investments.

“Then any inheritance should help pay for the extras to make life more comfortable – or give you the lifestyle you want in retirement.

“If your pension savings will fall short without an inheritance, you need a robust plan B you’re prepared to use.

“This could include downsizing your home, working longer, or working part time in retirement.

“If an inheritance is likely to play some part in your retirement income, you need to be as sure as you can be that you’ll actually get one.

“It may feel like a tricky conversation to have with your loved ones, but you can’t base your planning on a vague assumption and crossed fingers.

“You may even find they’re happy to make lifetime gifts, which could be more tax-efficient.”

Kindly shared by Hargreaves Lansdown

Main article photo courtesy of Pixabay