Can you enjoy your retirement wealth and still leave an inheritance?

The debate around what point in your life to enjoy your hard-earned savings has sparked plenty of discussion in recent years, helped by the popularity of Bill Perkins’ book Die With Zero. Despite the title, the concept isn't about spending every last penny before you die but rather making the most of your wealth while you can.

After spending your working life, and a considerable amount of time, building up your wealth, it's worth considering whether you could be enjoying more of that wealth now while you still have your health. If you’re also planning on leaving something for your loved ones, it can be difficult to strike the balance and know when it’s the right time to start. 

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But how do you know when it’s the right time?

When you've spent years saving towards retirement, it's tempting to keep going until you've reached a particular figure. Perhaps you're waiting for your pension to reach a certain value or want to see your investments grow a little further before you feel comfortable drawing on them. 

You may have a healthy pension and substantial savings but still feel uneasy about the prospect of spending them. This is completely normal. After all, you're moving away from a regular income and into a period of life where the money you've accumulated will need to last for the rest of your life. 

However, some experiences have an expiry date and waiting too long can mean you may miss out. If you've always wanted to travel extensively, you may get considerably more enjoyment from doing so in your early retirement years, while you're fit and healthy. Equally, retiring a few years earlier might allow you to spend more time with your family, and young grandchildren, rather than continuing to work towards a savings target you may already have exceeded. 

This is where understanding how much you actually need becomes important. Once you have a clearer picture of what your retirement might cost, you can start making decisions around what you want to do, rather than simply how much you want to accumulate. 

Making the most of your money while you can

One of the most interesting concepts from Die With Zero is the idea of a 'memory dividend'. The experiences you enjoy today can continue to bring happiness for years to come through the memories they create. And those memories aren't necessarily just yours; they can be shared with your family and loved ones too.

Whether it's taking your family on a memorable holiday, helping your children onto the property ladder or spending more time with your grandchildren, the benefits of using your wealth can extend well beyond the initial experience.

Of course, perhaps the greatest difficulty with retirement planning is that none of us knows exactly how long our money will need to last or how much we're going to need.

We often find that people have a fairly good idea of what they've saved but are less certain about how much they can comfortably afford to spend.

Without that reassurance, it's understandable that you might hold back, even when you could potentially afford to enjoy more of your wealth or be more generous with those around you.

This is where cash flow planning can be particularly valuable.

How cash flow planning can help 

At The Private Office, we use cash flow forecasting to help you understand what your finances could look like throughout retirement, taking into account your current assets, expected income and future spending. 

By building a picture of your finances over time, we can explore what might happen as your spending and earning circumstances change. 

For example, you might be considering giving your children £100,000 towards a property purchase. Cash flow planning can help illustrate how that decision could affect your retirement finances, including how much you might have left later in life. 
We can also consider different investment returns, inflation assumptions and unexpected expenses to see how your plans might hold up if circumstances don't work out quite as expected. 

Sometimes the results can be surprising. You may discover that you've been unnecessarily cautious and could afford to spend considerably more. Or the forecasts may show that making a large gift now could leave you with less financial security than you're comfortable with. 

These forecasts aren't guarantees, of course, and should be reviewed regularly. But they can provide a much clearer basis for making important financial decisions. 
Once you have a clearer understanding of how much you need to fund your own retirement, you can also explore whether any surplus wealth could be passed on to loved ones sooner, rather than waiting until your legacy.

Could a living inheritance make more sense? 

For many people, leaving something behind for their family is just as important as enjoying their retirement. yet there's a growing argument for passing on some of that wealth while you're still alive. In fact, we ran a survey recently with over 2,000 respondents and found that 81% believe parents or grandparents should help younger generations financially during their lifetime, rather than simply leaving an inheritance when they die. 

Consider how much more useful an inheritance might be to your children when they're buying their first home or raising a young family, rather than receiving it much later in life when they may already be financially secure. Our survey also found that 71% believe financial support should be given early, when it can make the biggest impact. 

There's something quite rewarding about seeing your money make a difference. Seeing your contribution to their life with your own eyes means you get to share in the benefits of your generosity, and it can be very fulfilling.

Of course, you might prefer to support a charity or cause that's particularly important to you. Making donations during your lifetime means you can see how your contribution is being used, which may be just as meaningful as leaving a charitable gift in your will. 

What about inheritance tax? 

Passing on wealth during your lifetime can also help with inheritance tax planning, although there are rules to consider before making substantial gifts. 

You can currently give away £3,000 each tax year using your annual gift exemption, with any unused allowance carried forward for one tax year. Larger gifts may also fall outside your estate for inheritance tax purposes if you survive for seven years after making them, known as the 7 year rule in inheritance tax. 

If you have surplus income, you may be able to make regular gifts without them forming part of your estate, provided they meet HMRC's conditions.  

The wider inheritance tax position is becoming increasingly relevant too. The standard inheritance tax nil rate band, which is the amount you can pass on before inheritance tax becomes payable, remains frozen at £325,000 until April 2031. There is an additional residence nil rate band of up to £175,000 available when you pass your home to direct descendants, subject to certain conditions. With these thresholds remaining frozen while property prices and other asset values increase, more families could find themselves facing an inheritance tax liability.  

And from April 2027, most unused defined contribution pension funds and pension death benefits will be included within the value of an estate for inheritance tax purposes. This is a significant change for anyone who has been planning to leave their pension untouched to pass on to the next generation. 

However, before giving money away, you need to be comfortable that you won't need it yourself. Once an outright gift has been made, you generally can't simply ask for it back if your circumstances change. 

Finding the right balance 

There's no particular amount you should aim to leave behind when you die. Some people are perfectly comfortable spending most of their wealth during retirement, while others take great satisfaction in knowing they'll be able to leave a substantial inheritance. 
You might also find that your priorities change as you get older, particularly as your family circumstances evolve. 
Having a financial plan gives you the opportunity to think about these choices properly, rather than continuing to save out of habit or holding back because you're worried about what the future might bring. 

And if you can enjoy the retirement you've worked hard for while also seeing your wealth benefit the people and causes you care about, that seems a pretty good outcome.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate cashflow and estate planning or tax advice.