Britons are woefully underprepared when it comes to leaving their finances in order on their death, one of the UK’s biggest insurers has revealed.
Royal London – which boasts former Pensions Minister Sir Steve Webb as its director of policy – said that just one in four people have organised their financial information ‘well enough to allow their loved ones to handle their financial affairs on death.’
It also found that most families rely on savings, cash from the sale of a property and pension funds to deal with the fallout of a death.
And the process of writing a will is currently being reviewed, with the government proposing radical reforms – including potentially expressing your wishes via text message.
So, what’s the best way to get your financial affairs in order – and what will your family have to deal with when you die?
Writing a will
A will allows you to clearly state what should happen to your estate after you die. It also lets you lift a potentially huge administrative burden from your loved ones, compared to if you died without a will in place.
This is called ‘intestacy’. If you die without a will, your estate will be distributed according to rules under the Administration of Estates Act. We’ve outlined these rules in our guide to intestacy.
There are a number of options available to you. You could create a DIY will, which you write yourself using online software. Alternatively, you could use a solicitor or bank to write your will.
- Which? offers a will-writing service, allowing you to write a will as an individual or create mirror wills for couples. You can also have your will checked over by a legal expert. Prices start at £99 – find out more at wills.which.co.uk or call 01992 822 803.
Inheritance tax rules
Each person can pass on up to £325,000 before their heirs pay inheritance tax, at 40% of anything above that amount. This is your inheritance tax allowance or ‘nil-rate band’.
However, there are rules that could see married couples and civil partners pass on as much as £850,000 before any tax is due.
There are a couple of reasons for this. Your spouse or civil partner can inherit your entire estate free of tax, and any unused inheritance tax allowance, which totals £650,000.
But if your estate includes your main home, and it is being passed onto direct descendants, such as children or grandchildren, each person can pass on an additional £100,000 this year. This is known as the ‘residence nil-rate band‘.
This new allowance will rise by £25,000 each year until 2020, when it will total £175,000, meaning couples can pass on as much as £1m tax-free.
Understanding how much of your estate – which includes your savings, investments and property – is worth, and sharing that with your heirs will help them work out whether or not they will have an inheritance tax bill to pay when you die.
- You can find out more in our detailed guides to inheritance tax.
Passing on your pension
One asset that doesn’t fall into your estate for inheritance tax purposes is your pension.
If you have anything left over in a defined contribution pension, this can be passed onto anyone you nominate – potentially tax free. It can be inherited as pension income, or as a lump sum. Whether or not your heirs pay tax depends on the age at which you die.
If you die before the age of 75, they pay income tax at their personal rate.
It’s important that you complete an ‘expression of wish’ form with your pension company to nominate the person who will receive any remaining pension savings you have when you die.
- Find out more in our guide to the pension freedoms.
Does your family need to deal with probate?
Obtaining a Grant of Probate gives someone the legal right to handle your affairs when you die. This will involve settling all of your bills and gathering together all of your assets.
Probate is often necessary for all but the most simple estates. Most banks, for example, will agree to make direct payments from your bank account to cover funeral expenses. Any funds in your accounts will be frozen until the executor of your estate has been issued a grant of probate.
For small estates, however, some banks will release funds without probate. Click the link to see a list of banks and their rules around probate.
There are things you can do to make the probate process smoother for your family. Providing a clear list of all of your assets, where they are held with account numbers and even contact details, as well as all of your debts and where they’re held, can help your executors get on the front foot at a difficult time.
HM Courts and Tribunal Service has just launched a new service which allows executors to apply for probate online.
- Which? Legal Probate can help you through the entire probate process with comprehensive guidance and one-to-one, expert help from our trained probate specialists for a fixed fee. The service costs £199. See probate.which.co.uk or call 01992 825001 Monday to Friday 8.30am-6pm.