40-somethings set for inheritance shock

People in their early 40s expect to get an average inheritance of £180,217, and one in ten plan to fund their entire retirement through money they inherit from their family. Unfortunately, the vast majority of them haven't mentioned this to their parents, so as a result they are massively over-estimating how much they are going to get.

A study by professional recommendation website VouchedFor revealed that in reality the average inheritance for this age group is likely to be closer to £69,871 - after tax and the cost of care have taken their toll - which will leave a gaping hole in 40-somethings' retirement plans.

Why so wrong?
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The problem, the site found, was that only 39% of 40-somethings had spoken to their parents about inheritance. Their calculation is therefore likely to be a guess based on things like the value of their property, which means they are failing to take into account issues such as the cost of care and inheritance tax.

Adam Price, Managing Director of VouchedFor, said: "These figures have alarming repercussions, particularly for middle aged consumers. Growing property prices, increasing life expectancy, the rising cost of care and tax are all impacting the average inheritance that Britons receive, though clearly expectation hasn't always kept up with reality. This is particularly true for those aged 41-45, their inheritance expectation is increased as they start to worry about funding their retirement yet clearly they risk a dramatic shortfall if they don't put more informed plans in place."

Among those in their early 50s, the picture changes. By this stage 54% have spoken to their parents about inheritance, and as a result, expectations fall to an average of £83,550 - within a whisker of the amount they are likely to receive.

What should you do?

Clearly it's essential to speak to your parents about inheritance sooner rather than later. At its most basic, this will make it clear how much various members of the family will receive, so they can factor an inheritance into their long term plans.

This also enables people to make alternative plans for their retirement income, to help close the gap between what they were expecting to inherit and what they are likely to get.

It also enables the wider family to consider issues such as inheritance tax - and whether there are ways of reducing the tax bill while they are still around. Given that 40% of Britons are concerned that inheritance tax will impact their inheritance pot, it's surprising that only 2% have taken action to lower their potential bill. In fact, 78% of Britons have not even written a will. As Sanjay Badhan of Future Planning Wealth Management points out, it's essential to leave a will - as it's the only way to be sure the estate you leave behind goes to those you want to benefit from it.

There are also several steps that can reduce any potential inheritance tax bill. Robert Caplan of First Wealth in Harrow says that if you can afford it, you should try to give 'regular and habitual' gifts out of excess income - as these gifts are considered to be outside your estate immediately (normally gifts are considered part of your estate for seven years after making the gift).

Owen Cook of Ablestoke Wealth Management, says there are other gift allowances worth exploring - which mean you can give away £3,000 a year in a way that's considered to be out of your estate immediately.

Mark Insley of Ascot Wealth Management, also suggests considering buying whole of life assurance, on the grounds that by paying a monthly premium you are depleting your estate, and then on death the benefit is paid out to a Trust tax free and is often used to pay any IHT liability you have.

Finally, Caplan adds that while trust planning can be more complex and expensive, it can be important for people with complex or sizeable estates.