What does a successful life with money look like? Is it striking the perfect balance between work and play over decades, or is it making enough of the stuff to retire early and go on some cruises?
I guess it is all relative, but I’d argue that leaving behind a multimillion-pound estate is certainly not a sign of a lifetime of good money management. And that is true now more than ever.
Leaving behind your fortune to loved ones used to be how it was done, but those days are long gone. For starters, inheritance tax is much more of a threat now than it has been and secondly, more families than ever are being torn apart by rows over wills.
This is why I would consider dying without a penny left to my name an indication of a life well lived. Of course I am not talking about dying destitute; rather, I want to ensure every pound I earn during my lifetime is spent exactly how I would like it to be.
I consider financial nirvana, as it were, to involve building enough wealth to find financial freedom and live the life I want — and then spending it all.
There are plenty of obstacles standing in our way, but the good news is that we have motivation and ways to navigate around them.
The significance of the chancellor’s move to bring pensions into the inheritance tax fold from April next year cannot be overstated. The nil-rate band — the amount each person can pass on tax-free — has been frozen at £325,000 for more than 15 years now, while inflation has pushed up the paper value of our homes and wealth. Adding pensions on top of property and savings means that tens of thousands more families will be caught out by the 40 per cent tax if they do not take action to disperse their wealth before they die.
So how can you save enough into a pension to enjoy a decent retirement, and then how can you spend it efficiently so nothing is left for the taxman or lawyers? A lot of this comes down to retirement and tax planning.
But the good news is that we now have plenty of flexibility over how and when we can access our retirement savings. The pension freedoms of more than a decade ago released us from the obligation to convert our savings into an annuity, which pays an income for life — and typically didn’t provide good value for money.
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Now we have the ability to live off the income generated by our pension investments and dip into the capital if need be. We can also choose to buy an annuity later in life with what remains of our pension savings.
In fact, buying an annuity in your seventies may just be the best way to drain your pension pot. A 70-year-old can now get an annuity paying close to £8,500 every year until they die in exchange for £100,000. Meanwhile, a 60-year-old would get less than £7,000 a year.
It’s important to separate your retirement into two periods: the healthy, active years in which you’ll likely travel and spend more, and the less healthy, less active years in which you’ll spend less.
The big potential spanner in the works is care costs, which you generally have to fund yourself in England if you have savings worth more than £23,250. But if you’ve converted your savings into an annuity, there is no capital to raid.
Your main residence will not be factored in to the funding assessment if your spouse lives there or you receive care at home. Downsizing can also free up plenty of equity to keep your estate below the nil-rate band and the extra residence allowance of £175,000.
Family money is now, often by necessity, being distributed earlier so that relatives can benefit at the optimal time and also so benefactors can see their loved ones enjoy it. Today most young adults need family money to give them a decent start in life. Extreme student debt and out-of-reach house prices mean their prosperity depends on it.
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Besides, we must also all know of someone who has been embroiled in a family rift or upset by an argument over inheritance. The courts are seeing a steady surge in families disputing wills and fighting over inheritances. And the only winners are the lawyers and the tax office, which collects interest on unpaid inheritance tax at 7.75 per cent when the six-month deadline passes.
Again, the key to amassing wealth is to start investing at the earliest possible time. Life will always throw curveballs at you and rarely do things go to plan. But as far as ambitions go, it makes total sense to spend a lifetime stuffing your pockets and then emptying them out.