It used to seem relatively simple to decide on a way to pass on wealth to the next generation.
Pensions were previously outside the scope of Inheritance Tax (IHT) calculations, meaning that you could amass wealth in a pension pot and have it pass tax-free to your beneficiaries.
From 2027, that will no longer be the case as unspent pension pots are exposed to IHT.
This is causing a great reconsideration of whether a fixed-income strategy is more effective and whether pensions are still worth considering as a vehicle for passing on wealth.
How can income be used to pass on wealth?
Rather than having a lump sum that is then transferred after you die, generating an income empowers you to design an effective inheritance strategy that works for you and your loved ones.
Gifting remains a powerful way to limit IHT exposure, as gifts given more than seven years before you die are exempt from IHT and a tapered tax rate applies on gifts given in the years between.
When you generate an income that exceeds your requirements, you can either invest that money into something like a trust that can then be passed on to descendants or you can gift the surplus directly.
Is generating income or building a pension better for inheritance?
Every individual is different and the exact nature of their wealth strategy will need to be determined by consultation with a financial expert.
However, it is worth considering making an income-based strategy at least part of your overall inheritance plan.
Bond markets are a good place to start, given their current strength and the stability of the investment.
Cash ISAs are also relatively stable investment opportunities, while stocks and shares ISAs are slightly higher risk but may return greater rewards.
ISAs generally serve as tax-efficient wrappers for wealth and the compound growth of investment possible through these accounts can be beneficial in the long run.
Our team can work with you to determine the most effective way of structuring your finances and assets to reduce your tax obligations and strengthen your financial future.