Inheritance – A case study

An inheritance from a much-loved relative brings with it mixed emotions. There is great sadness, inevitably, that the beloved one has gone, but there follows the recognition that their legacy to you may make a significant difference to your life and financial security.

Before we’re faced with that moment, we must avoid planning our future based on the expectation of a significant inheritance. Firstly, we have no idea when we might get the inheritance; we’re all living much longer, and we may well be well into our own retirement before we receive a legacy. Secondly, we have no idea how much it will be — care home fees can very quickly eat into a potential inheritance.

Even so, we cannot ignore that the recent phenomenal increase in house prices (the average house price in the South East is now in excess of £300,000*) means that more people are receiving a significant inheritance even when the house is the sole legacy.

Mixed emotions

From my own experience, I know that inheritances are imbued with emotion; it is not always easy to decide what to do with the money that has been left to us. Recent statistics showed that over 60 per cent** of people who received an inheritance saved it. Sure, these savings may have been spent later in a flurry of lavish excess, but my suspicion is that in some cases this money remains saved throughout the beneficiary’s lifetime until it is once again passed on to the next generation. The reason for this is that for many, perhaps, the money left to you never really feels fully your own.

But should you feel like this? Generally, the parents and grandparents who leave a legacy did so wishing for this money to have a positive impact on the lives of their children or grandchildren. They wanted it to change the lives of the loved ones after they were no longer around.

So, how could you use the money you have been left to change your life? One option is to retire early. My dad died of cancer aged 64 after a lifetime of hard work and a very short retirement, so this is a topic close to my heart. Extra years of retirement in your early sixties or late fifties could be some of the best times of your life. You are still young and active enough to enjoy yourself and you have a lifetime of experience behind you to be able to fully appreciate and explore the world.

Deciding to retire early requires a certain degree of bravery, but many people don’t take the time to consider whether they can afford to do so, even after receiving a significant inheritance.  However, with thorough financial planning it can be an informed decision taking into account all the potential risks. With a qualified planner’s guidance, you may be able to achieve outcomes you never thought possible. The inheritance may change your life, just as your loved one wished.

This is probably best demonstrated by a case study.

Mr & Mrs Jones

Mr and Mrs Jones are both 55; they work hard and have joint net earnings of £50,000pa. They are paying off a mortgage, which will be fully repaid by the time they’re 65. Between them, they spend £30,000pa but don’t have time to do many of the things they would really like to. They save £12,000pa into ISAs.  They have pension funds that are projected to be worth £200,000 at age 65 — which is when think they can afford to retire. Detailed analysis of their expected future expenditure has shown that £25,000pa will facilitate the lifestyle they desire in retirement.

This is very sound thinking, and the cash-flow chart below shows that, if there are no significant changes to their circumstances, Mr and Mrs Jones will have a very secure retirement with cash/investments of over £150,000 — even if they live to age 100.








However, right now, Mr and Mrs Jones are not enjoying their jobs and they have nowhere near enough spare time. Their weekends are spent doing housework, and they hardly ever spend any quality time together. They would love to retire as soon as possible.

Unfortunately, it is probably not going to be possible for them to take early retirement, as they rely too much on their earned income to meet their expenditure. The chart below shows what would happen if the Joneses took their pension benefits and attempted to retire at age 60 instead of 65.

Lots of orange on the chart suggests that the outcome of this is probably not the lifestyle the Joneses desired! They have run out of money by their late sixties, from which point they face a very meagre retirement. But hang on! This does not tell the whole story…

Mr Jones’ mum died this year and left behind a house worth over £300,000. This was sold and the proceeds split between Mr Jones and his sister. Mr Jones ended up inheriting exactly £150,000.

Mr and Mrs Jones discussed what to do with this money and decided, after much soul-searching, that they would do the sensible thing and stash it away. “This is what mum would have wanted,” they agreed. “We are being very prudent and perhaps once we have retired at 65, we can spend some of it.”

Make the most of your money

But the fact is, once they’re 65, disregarding the inheritance, they will have all the retirement provision they need to live the life they desire ­— they are unlikely to spend very much extra. It is most likely that this money will remain stashed away until Mr and Mrs Jones die, and they will leave it to their children (who are already very well-off in their own right, and who will additionally inherit the value of Mr and Mrs Jones’ house). Meanwhile, Mr and Mrs Jones continue to work hard and have little time to enjoy life.

Had Mr and Mrs Jones consulted a Financial Planner when they received their inheritance, the situation could have been very different. The Financial Planner would have established what was important to the Joneses and would have identified they weren’t enjoying working and desperately wanted more free time. The planner would have ventured: “I don’t think you can retire quite yet, but how about retiring at age 60 — if I can show you that you can afford it?”

The planner would have been able to demonstrate that, yes, it was an affordable plan — as shown in this cash-flow chart.***

OK, so the Jones children won’t inherit quite as much as they might have, but they don’t need it anyway. The major plus is that Mr and Mrs Jones can enjoy an extra five years of active retirement, doing all the things they have always wanted to do — potentially fantastic years that otherwise would have been wasted working…and complaining!

With the help of a Financial Planner, the Joneses have taken control of their financial future. They have peace of mind and they understand how their assets can work optimally for them. You can’t put a value on that…. and you can’t get back those years spent not doing the things you really wanted to do.

* Rightmove – average house price of properties sold in the South East in 2013

** Office of National Statistics – Inheritance in Great Britain, 2008 – 2010 (published 29th October 2013)

*** Financial planning and cash-flow forecasting is based on certain assumptions that cannot be guaranteed.  A financial plan is always evolving and should be reviewed on a regular basis to ensure that desired outcomes can be met.

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