Leaving wealth behind for your family could be more important than ever as high house prices and living costs may make it harder for them to reach certain financial milestones.
For example, according to Finder, the average age of a first-time homebuyer in the UK increased from 30 in 2007 to 34 in 2024. And the average deposit for a first home in 2023 was £53,414.
As such, an inheritance could make it easier for your adult children to buy their first home. It might help with other life goals such as getting married too. Alternatively, the wealth you pass on could help them achieve financial stability and start working towards their own long-term goals.
Unfortunately, if you don’t plan carefully, you may leave your loved ones a “negative inheritance”.
This describes a situation where your own wealth runs out and your family must contribute to your lifestyle, the cost of long-term care, or your funeral expenses. As a result, even if they inherit a small amount of wealth from you, they’re at a net loss.
Consequently, instead of helping them work towards their goals, you could make financial planning more difficult for them.
Read on to learn how you risk leaving a negative inheritance and how to potentially avoid the situation.
You may be more likely to need expensive care in the future
As you get older and potentially face more health issues, you may require care. This could be home care, where somebody visits you to help with general household duties or provide medical care. Alternatively, you might need to move into a residential care facility.
You may be more likely to need care in the future as the King’s Fund reports that healthy life expectancy – the number of years people live in good health – is falling.
Between 2020 and 2022, healthy life expectancy was 62.4 years for men and 62.7 years for women.
In comparison, according to the Office for National Statistics (ONS), a 50-year old man has a total average life expectancy of 84, while a woman of the same age can expect to live to 87. Consequently, you could live for 20 years or more in poor health.
Additionally, healthy life expectancy decreased by 0.8 years for men and 1.2 years for women since it was last measured for the period between 2011 to 2013. As a result, you may be more likely to need expensive care for longer.
If you do require care, depending on what assets you have, you may need to fund it yourself.
The local authority will only help with care costs once your assets fall below £23,250
The local authority may support you with care costs, but any help they give is means tested. As such, you might not qualify.
In the 2024/25 tax year, you won’t receive any financial support for care costs if your total assets – including your home – exceed £23,250. This is known as your “upper capital limit” (UCL).
If your assets equal between £14,250 and £23,250, you may receive some financial support but will have to pay a “tariff income” of £1 a week for every £250 you have over £14,250.
You may also need to contribute from your regular income.
Once your assets fall below £14,250 the local authority will pay for your care but you may still need to make a small contribution from your income.
Considering carehome.co.uk reports the average cost of residential care is £1,160 a week (or £1,410 a week for nursing care), you could quickly spend a large portion of your wealth before falling below the UCL and qualifying for financial support.
Once you deplete your savings, you might be forced to sell your home. Only once you spend the proceeds and fall below the UCL again will you benefit from support with care costs.
So, if you don’t plan accordingly, you might be forced to spend most of your retirement savings and sell your home to fund care. As a result, you may not have much left to leave as an inheritance.
Your family may receive a negative inheritance if they contribute to your care or funeral costs
If you don’t plan accordingly for care costs and end up depleting your retirement savings, your family may have to help with certain expenses.
For example, your adult children might assist with your care, either in your own home or by inviting you to move in with them.
If you move into their house, their utility bills and grocery costs might increase and they may need to make costly adjustments to the house so it’s safe for you. Your adult children may also need to reduce their working hours so they can care for you, and this could affect their earning potential.
Additionally, after you pass away, your beneficiaries may need to pay for a funeral and the administrative costs of dealing with your estate. According to SunLife, the “cost of dying” in 2023 was, on average, £9,658.
If there is not enough wealth left in your estate to pay these costs, it falls to your family. They might not be able to recoup wealth they spent on caring for you either.
It’s also worth noting that the executor of your will must pay any debts from your estate, and this could further reduce the wealth available to cover death costs or leave an inheritance to loved ones.
Consequently, your beneficiaries might incur costs that outweigh the wealth you leave to them, meaning they receive a negative inheritance.
Fortunately, if you plan accordingly, you may be able to prevent this situation.
3 ways to protect your family from a negative inheritance
1. Plan for care costs
Making sure that you’re prepared for the cost of long-term care is one of the most effective ways to avoid leaving a negative inheritance.
We can use cashflow planning to model how much you might spend on care should you need it, and how this will affect your savings. These forecasts also give you an idea of how much additional wealth you need to comfortably pay for care.
You might use cash savings, investments or pensions to cover the additional expenses. If so, we can help you increase contributions now to ensure you have adequate savings. Alternatively, you could explore options such as an immediate needs annuity.
When you plan ahead, you’re more likely to be able to pay for care without spending all your savings or selling your home.
2. Create a detailed retirement budget
If you spend all your savings too early in retirement, you might not have enough left to pay for care if you need it. As a result, you may have to sell your home or rely on your family members to help you cover the bills.
Yet, if you draw from your savings and pensions more sustainably, you can ensure that you leave enough to pay for care should you need it. To achieve this, you may benefit from creating a detailed retirement budget.
This could include:
- Essential expenses and utility bills
- Grocery costs
- Travel
- Eating out and socialising
- Supporting loved ones
- Care costs.
Your budget may also give you an idea of how many years you can fund your desired lifestyle for. If necessary, you could adjust your spending to help you afford care costs.
3. Consider pre-paying funeral costs
Funeral costs are one of the biggest expenses that could push your family into a negative inheritance if they can’t pay for them using wealth from your estate. You may be able to reduce the financial burden on your loved ones by pre-paying funeral costs and making plans now.
This also makes the process easier for your family during a difficult time and ensures that you have the send-off you hoped for.
By taking these simple steps, you may be able to reduce the chances of leaving a negative inheritance for your loved ones.
Get in touch
We can help you plan for care costs and potentially leave more wealth for your loved ones.
Please give us a call on 01276 855717 or email info@braywealth.com today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
The Financial Conduct Authority does not regulate estate planning or cashflow planning.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
Approved by the Openwork Partnership on 01/08/2024.
Production
