Working out how you’re going to fund your lifestyle in retirement is a highly important process. In fact, you may have read our other article in which we discussed some of the methods you might use for funding retirement, such as your pension, business, or property.

Another option that some people think they’ll be able to use is an inheritance they’re set to receive from a loved one, perhaps a parent or grandparent.

In principle, this seems like a good idea; as morbid as it may sound, your loved one will die at some point, and so you may well be entitled to part of their estate if that’s what they’ve put in their will.

However, relying on an inheritance for your retirement comes with some key risks that you should be aware of before you decide to depend on it.

Read on to find out what they are, and how they could affect you.

You don’t know when you’ll receive it

Firstly, you simply can’t know when you’re going to receive your inheritance.

It seems heartless to approach this point so pragmatically, but it’s important to do so to help you make an informed choice.

According to the Office for National Statistics (ONS), the average life expectancy of a male in the UK between 2018 to 2022 was 79 years, rising to nearly 83 years for females. But it’s entirely conceivable that your loved one will outlive these figures – after all, it’s an average, not a maximum.

You may find yourself in the middle of your retirement and unable to live the lifestyle you want, for the rather macabre reason that your loved one is still alive!

Additionally, your loved one’s wishes might even change during this period. They might decide to change their will and rejig how their wealth is divided between you and their other beneficiaries.

If you’ve built your entire retirement strategy around the amount you were initially set to receive, this could throw your plans into disarray. It could even prevent you from being able to live the kind of lifestyle you wanted.

Your loved one may need your inheritance to live on

A big issue you may face in relying on an inheritance is that your loved one’s circumstances could change while you’re waiting to receive it.

For example, a stock market downturn that temporarily reduces the value of their pensions may mean they have to rely on their savings and other investments.

These might be the funds you were planning to use in your retirement, meaning they’re essentially eating into the money you intended to use for your own post-work life.

Even worse, your loved one may require later-life care if they become unable to look after themselves.

According to care home search and review site, the average weekly cost of a residential care home is £704. This rises to £888 for specialist care homes, such as for dementia. Annually, that’s a cost of £36,608 and £46,176 respectively.

You never know whether your loved one might require this kind of assistance. Needing care for just one year could put a notable dent in your inheritance.

Inheritance Tax may severely reduce how much you receive

One other key factor to consider is Inheritance Tax (IHT). Charged at 40% as standard, IHT could have a severe effect on the amount you receive from your loved one.

Just like everyone else, your loved one does have a tax-free amount called the “nil-rate band” (NRB) before IHT is due. In the 2021/22 and 2022/23 tax years, the NRB sits at £325,000.

There’s also an additional £175,000 residence nil-rate band (RNRB) if they pass their main home on to their direct descendants, such as their children or grandchildren.

That means your loved one could pass on up to £500,000, or £1 million if they’re married or in a civil partnership, to you and any other beneficiaries without attracting an IHT charge.

However, any amount over these thresholds could be subject to a 40% tax charge. If you haven’t factored a charge like this into your plans, it could again be detrimental to the lifestyle you want to live.

Your inheritance is a bonus

Arguably, the most sensible way to approach inheritance as part of a retirement plan is to think of it as a bonus.

Plan for a retirement where you may not have this money available, relying on your pension or whichever methods are most appropriate for you to fund your lifestyle.

Then, if it turns out you do receive the inheritance you expect, you can use that money however you’d like, safe in the knowledge that you have sufficient funds to live on in the meantime.

Speak to us

If you’d like to take control over your retirement plans, please get in touch with us at LightSide Financial Planning.

Email or call 0151 372 0161 to find out how we could help you.

Please note

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