Millions of people in the UK look after both younger and older family members, sandwiched between aging parents who need care and their own children. The extra demands made of these adults in their 30s and 40s, dubbed the ‘sandwich generation’, can leave their futures financially uncertain. We look at some ways those with double the responsibility can help plan for the future.
Be aware of the consequences of pension withdrawals
With soaring house prices, it’s unsurprising that so many parents have to step in and help their children get a foot on the housing ladder. One strategy they might consider for achieving this is to dip into their pension pot.
You’ll likely be aware that you can get tax relief on your pension contributions, up to £40,000 a year or 100% of your taxable salary. However, if you decide to help your children and in doing so withdraw money from your defined contribution pension scheme, the amount you can pay in whilst still benefiting from tax relief reduces. This is called the Money Purchase Annual Allowance and if you trigger it, you’ll only be able to pay £4,000 into a pension pot and still get tax relief, going forward.
Whilst parents frequently look to help children with major purchases such as getting a foot on the housing ladder, doing so can jeopardise their future if they substantially slash their pension tax breaks. Take advice before withdrawing the money to see if it will be an event that triggers the MPAA.
Be sure that equity release is right for you
If you own your own home and have plenty of equity (i.e. the value of the home is more than any mortgage on it), you might be tempted by one of the many equity release companies that offer to unlock the cash without having to leave your pad. There are various options for equity release – for example, most people take a lump sum which they don’t have to pay back until they die.
But as Martin Lewis explains, interest rates are far higher than a normal mortgage and the amount outstanding can build up very quickly.
“For example, borrow £20,000 aged 60 at 5.1% on a £120,000 home, and the amount you owe doubles roughly every 14 years. So live until 74 and you owe around £40,000, live until 88 and you owe £80,000.”
On top of those costs, you’ll need to pay arrangement fees (which are around £1,500 – £3,000), application fees, legal fees, surveyor fees and stamp duty.
A further issue is that if you decide to pay back some of the interest and capital early (as some plans allow you to do) this can affect your quality of life down the line. It’s worth speaking to an independent advisor to review the true cost of the plan and assess whether it works for you and whether other options, such as remortgaging or downsizing, might be preferable.
Plan for the cost of care
Some elderly people are entitled to help under the NHS Continuing Healthcare fund if they need care in later life. Entitlement depends on their needs being sufficiently severe (not on their funds) but funding is limited and many people are refused. If your parents fall into this bracket, they will need to fund the cost of care themselves. Once the Local Authority has refused their entitlement to funding, they will perform a means test and if your parents have assets worth* over £23,250, they can be used to fund care. When the assets deplete to below £23,250, the Local Authority will start to make a contribution – and at the lower limit of £14,250, the Local Authority will pay the costs. However, this will be subject to a limit – and if the care facility that you have chosen for your parents costs more money, the last of their savings may be depleted.
With the average cost of care at £29,270 per year for a residential care home or £39,300 per year if nursing is required (Laing & Buisson), funds don’t last long and unless your parents are of substantial means, it makes sense to plan ahead whilst they are in good health.
It is also worthwhile encouraging your parents to review their assets with a solicitor. For example, if they hold their property as joint tenants, each owns a 100% share of the property. When one dies, the other continues to own 100% and if they then require care, the whole value can be used towards care fees (subject to the lower £14,250 threshold). If they sever the tenancy and leave each other a life interest, half the value of the property is protected from the survivor’s future care fees. However, this must be balanced against the survivor’s needs – and it may be preferable to make those funds available so that the survivor can enjoy a better standard of care home. Such issues should be discussed with an experienced estate planning solicitor who can review your parents’ overall circumstances and goals before offering personalised advice.
* If only one parent needs care and the other is living at home, the property cannot be counted in the means test. However, if both parents need care (or one needs care and the other has died or is not living in the home), the home can be used. Sometimes it is possible to put a charge on the home rather than sell it, if this is preferred.
Discuss making a Lasting Power of Attorney
If your parents lose mental capacity and you don’t have a Lasting Power of Attorney, you’ll have to apply to the Court of Protection for an order to manage their affairs. This can be a slow and expensive process in contrast with the simple act of making an LPA.
Your parents can choose whether to allow you to act whilst they still have capacity (with their permission) or only after they have lost capacity. They can choose more than one attorney and for multiple attorneys, they can decide whether decisions should be made jointly, jointly and severally or jointly for some and severally for others. They can also leave instructions regarding certain assets, which must be followed.
It is always advisable to make an LPA with a solicitor rather than trying to draft the document yourself. It is very easy to draft the document incorrectly so that certain events (such as the incapacity of one of the attorneys) renders the entire document useless.
Don’t give away your home
Many people think giving away their home now is an easy way to avoid inheritance tax. There is a myth that after 7 years have passed, the property will no longer fall into your estate for inheritance tax purposes. In fact, if you continue to live in the property, it will still fall into your estate, unless you pay market rent. If you do pay market rent, your children will have to pay tax on it and in the long run, the inheritance tax savings don’t always outweigh the rent and tax paid.
Another situation is where parents give away their home and move into a rental property, but this leaves them exposed should their circumstances change in the future.
Take inheritance tax advice
There are plenty of ways to save inheritance tax that you’ve likely never heard of and it’s worth reviewing your circumstances with a professional. The inheritance tax allowance is £325,000, with a further allowance allowed if you leave your home to a direct descendent. If a married couple leave everything to each other, the first to die does not use any of their allowances which can be utilised by the survivor’s estate on their death. This will mean that, by 2020, couples can leave their children up to £1 million free of inheritance tax, thanks to the combined inheritance tax and newer residence nil rate allowances.
However, there are also risks involved with this plan. The survivor may need care and with such an arrangement, all of the family assets (down to the £14,250 threshold) could be used to fund the cost. Further, if the survivor remarries, their new partner would be first in line to inherit and it’s possible the children could see nothing. It’s important to discuss these issues with an estate planning lawyer and to find solutions which balance protecting a portion of the estate for the children with the survivor’s future needs.
Keep meticulous records
The sandwich generation often give away funds to both their children and parents – and these could have inheritance tax implications in the future. However, it’s worth knowing that Section 21 of the Inheritance Tax Act allows you to give money where it is normal expenditure out of income – meaning that it does not affect your usual standard of living. Further, Section 11 provides allowances regarding the maintenance of family, and Sections 19 (annual exemption), 20 (small gifts) and 22 (gifts in consideration of marriage/civil partnerships) all provide further allowances. The key thing in taking advantage of these is first, to be clear about the rules and second, to keep accurate records. A solicitor will be able to advise which exemptions apply to your circumstances.
Review your own Will
Most people start thinking about making a Will when they reach their 50s but it is not just your parents that should take this important step. Accidents and illnesses can affect us at any age and without a Will, assets will pass according to the rules of intestacy which may not work as you intend. Further, if you have minor children, it is essential to consider the issue of guardianship should both you and the child’s other parent die. With a growing number of Will challenges coming to Court, it is always advisable to use a solicitor to prepare the Will rather than trying to do it yourself.
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