How can I protect my retirement savings and should I be using a trust?

Our CEO Charlotte Ransom regularly answers questions for readers of the i paper – helping them to better understand their investments and how to effectively plan their finances to achieve their long-term goals. Many of these questions are also highly relevant for Netwealth readers.

Question: I am 65, have three children and am still relatively healthy. However, as I think to retirement, is there a way I can protect my considerable pension pot and property? Perhaps I could place it in a trust?


Answer: Most people look to protect and make the most of their assets that they have spent a lifetime accumulating in retirement and beyond. There are multiple ways you can safeguard your wealth, including setting up a trust, and you should be aware of your options and get professional help if you need it.


This all speaks to the importance of effective estate planning – where you arrange your estate and financial assets (including property) so they can be transferred to whomever you choose without paying unnecessary inheritance tax (IHT).


As you may know, each of us benefits from a nil rate band (NRB) or IHT threshold of £325,000 – up to this amount you do not have to pay any IHT. Any part of your estate which exceeds this threshold is usually chargeable to IHT on death at 40%. A couple will have double that amount and there is also now an additional benefit of £175,000 in tax-free allowance in the 2023/2024 tax year if you are passing your home to a direct descendant (child or grandchild). Therefore, the total protected estate can total £1m for a couple.


We can come back to IHT, but one of the first things you should do is to safeguard the funds you have set aside for retirement – this will maximise what you have to live on, and what you can pass on to your loved ones. You say you have a considerable pension pot and property. With a pension typically being the main source of capital to fund retirement, I am often surprised by how many people do not pay it the attention it deserves – yet there is often time to make course corrections if necessary as one sets out on the path to retirement.


So, what can you do to preserve your pension’s worth? You are 65, and you say you are thinking about your prospects in retirement, so you have some time to get things in order. This gives you the chance to check your pension carefully and fine tune if necessary to optimise its performance.


We would always recommend that any investment portfolio is well diversified – ideally a mix of global stocks and bonds to give you the chance to capture potential rises in asset prices and protect you somewhat if certain markets decline at different points in the economic cycle. So make sure this diversification is embedded in your pension portfolio, and then assess how much you are paying for someone to manage it on your behalf.


You should take some comfort from having accumulated a considerable pension pot but what could make it lose value much quicker than you think are the fees you pay each year, and the total cost of investing. Let’s assume you have in the order of £500,000 plus in your pension and take this sum as an example to show how much better off you could be if you pay less in annual fees for your pension pot to be managed.


For example, paying 2% in fees each year, and assuming investment returns of 5%, a hypothetical £500,000 pot could grow to just over £900,000 after 20 years – not an unusual timeframe with many of us now living longer than previous generations. If you pay 1% less in annual fees, your pot could grow to almost £1.1 million over the same 20-year period.


Of course, this is a simplified analysis – I don’t know how much you want to take as an income each year and we haven’t allowed for inflation, but you can see that it should be worth your while to assess how much you are paying now, and to change provider if necessary to help ensure you are considerably better off. Fees are one of the few areas where an investor can exercise control.


Using tax wrappers such as pensions and ISAs are recommended to grow an investment pot, and a pension in particular bestows specific tax advantages when it comes to inheritance. Any unused money in your (defined contribution) pension pot can be passed on to one or more beneficiaries of your choice when you die, and falls outside of your estate for inheritance tax calculations.


This could be one way of ensuring your three children benefit from your estate without fear of inheritance tax taking a large chunk from them. You must ensure, however, that they are specifically designated to be beneficiaries in your ‘expression of wish form’, so the trustees know who you choose your wealth to be passed on to.


While a pension has this considerable IHT advantage, you should note that property is less ideal for passing on wealth. Apart from your main residence being passed on to direct relatives as noted above, any property over the £325,000 individual threshold will face an IHT charge.


This situation – along with the increasing costs (including stubbornly high interest rates) and hassle of being a landlord – is persuading thousands of UK buy-to-let property owners to reconsider their options at retirement, as has been widely reported over the past year.


In your case, you don’t say how big of a property portfolio you have, yet you can probably take some measures to benefit your family. For example, if you are still working and you sell a property, you could shelter up to £60,000 a year from the proceeds in a pension – thereby adding to your potential IHT-free estate. There may be other ways you can take advantage of pension contribution rules – such as if you set up a company and take an income from that to fund a pension – but it is important to understand the regulations and associated nuances which is where professional advice might be helpful.


Likewise, to make the most of various gifting and tax-free allowances – and to ensure you appropriately structure your income and outgoings so you can maintain a comfortable retirement lifestyle – will also likely require tailored financial advice.


You also enquire about the potential of setting up a trust. The short answer is that you can set up a trust (where you transfer ownership of your assets to trustees to manage according to your wishes), or you may prefer the route of a Family Investment Company (FIC), depending on the level of control you are looking for, and the value of your overall estate.


Typically, the more control you wish to have, the more expensive the vehicle is to set up and maintain. An experienced financial planner can advise you on the ins and outs, and how you and your family could benefit. You will also need help from a solicitor should you decide to go the Trust or FIC route.


It is sensible to be thinking about how best to protect your retirement income and beyond. With a considered investment approach, and careful estate planning, you should be able to maximise your pension for when you retire, and tax-efficiently boost the sum you are able to leave behind. 




This article was published in the I on 17 March, 2024.


Netwealth offers advice restricted to our services and does not provide independent advice across the market. We do not offer advice in relation to tax compliance, personal recommendations with regards to insurance and protection, or advise upon the transfer of defined benefit pensions. Please note, the value of your investments can go down as well as up.


The answer here does not represent financial advice, nor should it be interpreted as a recommendation to invest.

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