James
Mitigating Inheritance Tax liability
Scenario
James was 55 and having worked in the city all of his career had built up large portfolios of shares, pensions, property and cash. He was divorced with three children.
He had decided to take early retirement and approached us wishing to understand the best way to generate an income from his pensions. He was also keen to ensure that his assets were structured to generate a return that kept up with inflation and wished for these to be professionally managed going forward.
Actions
We discussed James’ expenditure requirements and overall objectives. He had always lived a relatively modest lifestyle, and whilst he wished to enjoy his early years of retirement, did not envisage much change to his current spending patterns. He wanted to ensure that he could live comfortably, but also be in a position to pass as much capital as possible to his children.
We reviewed his current holdings and discovered that his pensions were held within various personal pension arrangements. He had several cash ISAs and his shares were primarily in a single company, as these had been acquired through his employment.
Analysis
Looking at James’ overall net worth, it was clear that there was potentially a large Inheritance Tax (IHT) liability on his estate that would be due following his death.
From our cashflow modelling, we could see that James’ total assets were sufficient to meet his needs for the rest of his life. We therefore discussed his objective of generating income from his pension, particularly given that the capital within the pension would currently be considered as outside of his estate for IHT.
We reviewed his non-pension assets and concluded that whilst he had a relatively diversified portfolio, no single asset was in line with his attitude to risk. His cash holdings were all low risk and not keeping up with inflation, and his share portfolio lacked diversification.
We recommended that James’ pensions be consolidated into one arrangement which allowed him to benefit from a single charging structure. We also recommended that his non-pension assets be restructured into a diversified investment portfolio, aligned to his attitude to risk. We introduced him to an investment manager, who would create and manage the portfolio, making best use of his various tax allowances.
We then recommended that, rather than take income from his pension, we meet his income needs from the non-pension assets within his portfolio. This allowed him to maintain his lifestyle, whilst reducing the value of his estate and in turn his potential IHT liability. By leaving the pension untouched, this fund would be allowed to grow whilst being outside of the IHT regime. James would always be able to access the capital if ever required.
Outcome
James came to us with a clear plan but was considering each of his assets in isolation. In order to achieve the best outcomes, it’s essential that a holistic view to financial planning is taken.
Whilst capital can be invested in similar ways, the tax treatment of different products means that they can be used for different means. This may mean using a product to achieve a goal that it was not originally designed for, but which may ultimately lead to a superior outcome.
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A client since 2019
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Clients since 2016
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A client since 2019
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Clients since 2017
I knew I needed to begin saving and planning for the future but didn’t know where to start. Stratton helped me to understand my finances and put together a savings plan that is affordable and works for me. I now have and an ISA and a pension, and whilst retirement is many years away, I have the peace of mind that I am saving for my future. I look forward to working with them for many years to come.
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A client since 2016
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A client since 2018
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A client since 2015