In our last newsletter, we wrote about what's important financially for people in their 30s. We got quite a few comments about this piece and some requests to set out the financial priorities for people in their 40s. So here goes...

Keep control of your lifestyle

For a lot of people as they enter their forties, the financial pressure starts to ease a bit. As a result of career progression and increased earnings, the bills (in particular the mortgage repayments) don’t look quite so daunting any more. And this is when people’s lifestyles can run out of control. Rather than putting their increased wealth to good use, they simply grow their lifestyle until this becomes the new “norm”. And as a result, that hard earned extra income ends up delivering zero impact to your long-term financial health. Put that extra wealth to good use. 

Stay vigilant with debt

Debt costs have been very low in recent years, with base interest rates around the 0% mark. However this situation is changing - we saw last week the first rate increase by the ECB in more than a decade. One of the challenges caused by low interest rates is that people can become a little complacent about debt, thinking it will always be cheap. Be very prudent about taking on new debt, and stress-test your finances carefully against the impact of rising interest rates. Do you really need to take on debt for home improvements, or for a fancy new car? Does it make more sense to save first and spend later?

Think carefully about home improvements

We’ve seen a number of examples of people with the back broken on their mortgage, and then deciding that it’s time to almost re-build the house. The rationale is usually around higher income levels making this possible, and also because the kids need more space – don’t they? This may well make sense, just be clear that the it’s hard to recoup money spent on your house as it usually isn’t fully reflected in future valuations. Also think past the next 5-10 years – will you want a bigger house when the kids decide it’s time to move on? Yes, make your house more comfortable and enjoyable to live in, but don't spend money unnecessarily on it. Oh, and best of luck trying to get a builder at the moment!

How's your emergency fund?

Maybe you were very forward-thinking years ago, listened to the advice and built a nice “rainy day” fund. Now’s the time to take a good, hard look at it. A fund built up a few years ago may be quite inadequate today. Do you need to add to this to cover your current level of expenses?

These are the golden years for building a nice lifestyle in retirement

These are often the critical years for retirement savings. You now have the financial firepower to really accelerate your retirement funding, and you also still have the time on your side to benefit from the magic of future compound interest. So make these years the high impact years in your retirement savings. Look to avail as much as possible of the generous tax reliefs on offer for pension contributions. 

How are your parents' finances?

One big challenge facing families today is the multi-generational impact on financial plans, it’s not enough to plan solely for your own future. Quite often, we see parents playing an important role in helping their children with significant deposits to enable them to get on the home ownership ladder or to remain in full-time education for longer than might have been expected. And as we see older people living longer and having more complex and expensive care needs later in life, the burden of financing this support can sometimes fall on the family. Does your financial plan take account of these costs?

It might be time to consider starting to transfer your wealth

Depending on your specific financial situation, now might well be the time to really start looking at the future transfer of your wealth. If you have significant assets to pass on eventually and as we've outlined in our other article this month, these can be seriously eroded by our penal inheritance tax environment. Planning for this a long time in advance will allow us to develop financial strategies that will enable you to significantly reduce this tax burden, ensuring your assets go mainly to your loved ones and not to the taxman. 

Your 40s are hopefully great years... Manage them wisely and you can establish a really strong financial foundation for the rest of your life.  

As Benjamin Franklin once said, “in this world nothing can be said to be certain, except death and taxes.” However the good news is that both of these don’t necessarily have to occur together.

This is one area where we regularly receive quite a lot of queries. As they start to think about their mortality and what they are going to leave behind for loved ones after they’re gone, our clients want to ensure that they leave a lasting positive legacy, rather than a nasty tax bill.

Inheritance Tax in Ireland today

Back in the heady days of 2009, a parent could leave up to €542,000 to each of their children (smaller thresholds apply for other relationships) before inheritance tax had to be paid. The tax that had to be paid was 20% of any excess over this amount. And then the economic crash happened… As a result, the parent / child threshold was slashed over a few years to a threshold of only €225,000, above which an increased tax rate of 33% had to be paid.

This caused all sorts of problems for people wanting to leave assets, particularly to a single child, and where their wealth was tied up in a single property. In many cases, the low threshold resulted in a family home having to be sold by a bereaved child, simply to pay a tax bill.

However the threshold has been gradually increased over recent years back up to €335,000 now. Unfortunately the tax rate has stayed stubbornly high at 33% of amounts above the threshold.

The situation is not so bad where there are a number of children inheriting from a deceased parent, as the threshold amount applies to each individual child. It’s important also to note that there is no inheritance tax payable by a bereaved spouse. There are also exemptions available when a farm or business are being inherited and in some circumstances where a child is living in the house to be inherited, so it’s important to get advice about these situations.

You need a plan

So if after you’re dead and buried, it is likely that the value of your assets will exceed the inheritance tax thresholds of all your children, you should come and talk to us, as all is actually not lost. It’s still possible to leave a lasting legacy rather than a tax bill, but this situation needs careful planning. Thankfully there are a few ways that we can help you.  

Be Prepared

You first of all want to ensure that your assets are distributed exactly in accordance to your wishes. To ensure this happens, make sure you have a will as this will clearly set out your wishes.

Spread the love (and the money)

When you’re writing your will and particularly if your assets are significant and it’s in accordance with your wishes, spread your inheritance also among grandchildren, parents, siblings, nephews and nieces as each of these will qualify for a tax free threshold of €32,500. Even outside of this, other people will qualify for a further reduced threshold of €16,250. The threshold amounts are lower… but it all counts. So spreading the love can reduce the tax bill payable later.

Don’t leave it all until death

Another way to reduce or avoid a tax bill on death is to pass on assets at an earlier stage. First of all, every individual can gift €3,000 p.a. to another individual without triggering a tax bill for the recipient. So two parents can gift each of their children €6,000 each year. This can build up over time…

Of course also passing on property at an earlier stage may result in it being passed on while asset values are lower, as property values generally increase over time. 

Get appropriate life cover in place

There are life assurance policies designed specifically to pay inheritance tax bills called Section 72 policies. These may well be the best route if your assets are significant, and your beneficiaries are likely to inherit amounts in excess of their thresholds. We can help you get this cover in place.

Dying is a serious business... If what you leave behind is important to you, then an inheritance strategy is needed. We’ll be delighted to help you leave a really positive legacy after you.