Why you shouldn’t rely on an inheritance to enjoy the retirement you want


a small wrapped gift being given, close-up of hands

According to Money Marketing, in the UK, baby boomers are estimated to hold over 80% of household wealth, leading many to consider them as the wealthiest generation in history.

Over the next few decades, this wealth will end up being passed down to children and grandchildren in what has been branded as the “Great Wealth Transfer”. Barclays expect over £5.5 trillion to be inherited or given as a gift to dependents.

If you’re expecting an inheritance, you might be considering using it to help to fund your later-life spending. In fact, MoneyAge say that 2 in 5 people say they intend to use their inheritance to fund their retirement.

However, becoming too reliant on a potential inheritance could lead to some difficult financial times further down the road. Read on to discover why relying on your inheritance could cause you problems.

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

Speculating when a loved one is due to pass is a difficult task for anyone. For this reason, should your family member live longer than expected, you may already be well into your retirement before you receive the money.

The Office for National Statistics (ONS) has measured post-retirement life expectancy in the UK to be increasing – men and women aged 65 are expected to live a further 19.7 years and 22 years, respectively.

With these figures increasing to 21.9 years for males and 24.1 years for females by 2045, this could mean your inheritance arrives later than expected. You might then have to delay your plans as you could be well into your 60s or 70s by the time an inheritance arrives.

This isn’t so much a problem to fix, but something to make sure you’re prepared for. One of the best ways to do this is by building a suitable pension fund that can enable you to retire on your terms, at your desired retirement date. If you do this, you can live the lifestyle you want without having to wait for an inheritance that might be years away.

You may not receive the inheritance you expect

Amendments to a person’s final will are not as uncommon as you might think. Your loved one’s circumstances could change, and you may need to face the possibility that you will inherit less than you expected.

Your giver may choose to spend more than you expected in their later life, require expensive care, or even opt for charitable giving that affects how much you receive. Remember it’s their money and they may end up using it as they wish, leaving you with a smaller inheritance than you may have anticipated.

If you were to rely on an inheritance to fund your retirement, your plans might have to change drastically if you receive less – or even none – of the legacy you were expecting.

You might lose 40% of any inheritance to tax

In the 2022/23 tax year, Inheritance Tax (IHT) is typically charged at 40% on any amount above the £325,000 nil-rate band (or up to £500,000 if an individual plans to leave their home to a child or grandchild).

This means IHT could be payable if you receive an inheritance above £500,000 – again affecting the amount you might receive.

Failing to adequately prepare for this event could see nearly half of your inheritance paid in tax.

This reinforces the importance of talking about your inheritance with those you believe to be leaving you something. There are ways to mitigate IHT and so seeking advice while your benefactor is still alive could help more of their wealth pass to you, rather than to HMRC.

Putting a plan in place can help you retire on your terms without relying on an inheritance

One of the safest approaches to take with your inheritance could be to plan for your retirement without taking a potential lump sum into account.

By doing this, you can ensure you’ll have sufficient assets to fund your retirement without the possible inheritance – so you can live the lifestyle you want whatever happens.

Firstly, it’s important to think about what you plan to do in retirement. What are your goals and ambitions?

Once you know this, you can start to establish just how much you’re likely to need to live this lifestyle.

We can then create a retirement plan based on your pensions, savings, investments, and other assets to establish whether you’re on track to meet your goals.

Using cashflow modelling software, we can work out whether you’re likely to have “enough” without the need for an inheritance. This gives you the peace of mind that you’ll be able to live the retirement you want, even if a potential inheritance doesn’t materialise or arrives much later than you predicted.

Get in touch

If you’d like to secure the retirement you want on your terms, get in touch to find out how we can help you.

Please contact us by email info@investmentsense.co.uk or call 0115 933 8433.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.