Your wealthy clients could be in danger of “underliving” in retirement. Here’s why

If you have wealthy clients who are already retired or approaching this milestone, there is one phenomenon they could be in danger of: “underliving” in retirement.

Of course, most individuals need meticulous planning to ensure they do not run out of money in later life – particularly in a time of high inflation. The Office for National Statistics (ONS) reports inflation reached 8.7% in the year to April 2023 – and for retirees, this means their savings could have less spending power and be depleted more quickly.

Yet for your clients who may never have to worry about “running out”, living too meagre a lifestyle can have several ramifications for their wealth later on.

While it may be counterintuitive to encourage your clients to spend more than they already are, underliving in retirement could be just as detrimental as living beyond their means in some cases.

Keep reading to find out why your wealthy clients could be in danger of underliving in retirement.

Your wealthy clients may be living with more financial stress than necessary

From a mental health perspective, your wealthy clients could be experiencing far more financial stress than they actually need to.

Perhaps they spent their career building a business from the ground up, or working in a senior role for a large firm. After a long career in intense roles, they’re likely accustomed to high-pressure environments.

As such, your clients could carry this mindset with them into retirement, and may feel as if they need to count every penny and live cautiously, even if this couldn’t be further from the truth.

This way of living could not only deny your clients and their families the amazing experiences they could be having in retirement, but it could also lead to poor mental health and high stress levels.

Simply put, feeling worried about not having “enough” could cause your clients to sell themselves short in retirement.

In these instances, financial planning can help. We can use cashflow modelling software to project how much your clients could take in retirement income each year, while maximising the tax efficiency of this income and factoring inflation into the equation.

With these aspects in mind, and safe in the knowledge they have enough to thrive on and more, your clients could release the financial stress they’ve been carrying and embrace their retirement lifestyle wholeheartedly.

If your clients are underliving in retirement, much of their estate could be passed to HMRC when they die

Financially speaking, another significant consequence of underliving in retirement may be that your clients hand over much of their wealth to HMRC when they pass away.

Of course, it is essential for your clients to live sustainably in retirement, preserving their wealth both for later-life costs and for the next generation. Yet holding on to the majority of their wealth until they pass away could mean that a large portion of their estate is eroded by Inheritance Tax (IHT) later on.

Indeed, reducing the value of their estate over time could mean your clients can still help their children and grandchildren financially, while strategically decreasing the amount of wealth that will be subject to IHT.

Here are two ways your clients can stop underliving in retirement, and simultaneously reduce the value of their estate for IHT purposes.

1. Tick items off their bucket list in retirement

First and foremost, one of the easiest and most enjoyable ways to reduce the value of their estate for IHT purposes is for your clients to simply live life to the fullest in retirement.

If your clients have worked hard throughout their lives and left little time to pursue opportunities they’ve always dreamed of, now is the time to tick those items off the bucket list.

With the help of a financial planner, who will use cashflow modelling to give your clients an idea of how much they need to live their desired lifestyle, your wealthy clients can confidently spend their hard-earned wealth on amazing opportunities in retirement.

In doing so, they can make irreplaceable memories, and leave less wealth subject to IHT when they pass away too.

2. Employ a “giving while living” strategy that could benefit their children and grandchildren

Secondly, your clients can help the younger generation financially throughout retirement, meaning they leave fewer assets exposed to an IHT bill when they pass away.

As of the 2023/24 tax year, your clients can give £3,000 a year tax-efficiently, split between however many people they like. For instance, they could give £1,000 a year to each of their three children. This is known as their “annual exemption”.

What’s more, they can carry forward their unused annual exemption from the previous tax year, meaning their annual exemption could increase to £6,000.

If your clients were to maximise their annual exemption each year until they pass away, this could gradually reduce the value of their estate for IHT purposes, and help their loved ones with their own dreams and goals in the process.

In addition, ringfencing funds within trusts can reduce (but not completely avoid) IHT in most cases. The rules around trusts and IHT are complicated, and if your clients wish to set one up as part of their estate plans, it could be wise for them to consult a financial planner when they do so.

Get in touch

If your clients need guidance on living to their full potential in retirement, put them in touch with us at WKM. Email info@wkmwealth.co.uk or call 0116 403 0138.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

All contents are based on our understanding of HMRC legislation, which is subject to change.