How to get your finances in order

It’s not easy thinking about illnesses or death, but getting your finances in order can help loved ones and give you peace of mind should the worse happen to you. 

Discussing money matters, and making some key preparations, could save your family money, time and stress.

Sadly, the number of deaths registered in the UK in 2021 reached 689,629 due to the Covid pandemic: an increase of 14% from 2019, and the highest figure in over a century.

We explain how to get your finances in order, from writing a will, to planning for inheritance tax and thinking about probate.

1. Make a will

You’re never too young - or healthy - to make a will. Technically, you must be 18 or over, but all adults should consider making a will. It doesn’t need to be long, or expensive. There are plenty of low-cost online will writers, like Beyond, Farewill and Bequest. Some, such as Bequeathed, offer a free service, although there are no legal checks so you need to know what you are doing. You can also buy templates from stationary shops or online.

If you have complicated affairs, such as owning a business or being remarried for example, it’s best to pay for a solicitor instead. You may be able to get your will written for free by a solicitor, in exchange for a voluntary charity donation, by taking part in Free Wills Month in March or October. 

If you’re a member of a trade union, you may be entitled to a free basic will, so do check. For example, Unite and Unison offer them to members.

There are many reasons for writing a will, including if you aren’t married to your partner (if you don’t have a will, your partner could be left with nothing), you have children (you can nominate a legal guardian in your will for those aged under 18), or if you own a property with someone else. 

More broadly, a will allows you to set out exactly who receives what in terms of your money and possessions, as well as outlining any funeral wishes.

Sean McCann, chartered financial planner at the insurance firm NFU Mutual, comments: “If you die without a will, your estate will be distributed under the laws of intestacy. These laws don’t provide for your partner to benefit if you are unmarried / not in a civil partnership, regardless of the length of time you have been together.

“If your partner is financially dependent on you, they could make a claim against your estate, but this can be a time-consuming and expensive process with no guarantee of success. To make sure those you want to benefit actually do so, it’s vital to make a will and keep it up to date if your plans change.”

2. Don’t forget your pension(s)

Make sure your pension providers know who you want your savings to go to in the event of your death. 

“You should always ensure your ‘expression of wish’ – essentially a will for your pension – is updated, as many people are not aware that pension assets are not simply included in your will, despite making up a significant part of most people’s wealth,” notes Tom Kimche, client adviser at the online wealth manager Netwealth.

If you’ve lost track of your pensions, you can use the government’s Pension Tracing Service. 

3. Keep a list of important documents

Make a list of any information that will be helpful after you’ve gone - and tell someone where the list is.

The list can include the names of your pension providers, banks and building societies where you hold accounts, and any utility providers if you’re the one that normally pays the bills. Also add details of insurance policies, and memberships and subscriptions, such as trade unions. Don’t forget to include online storage accounts. 

Age UK has a handy booklet called LifeBook, which can be used to record this information.

Avoid including any passwords. They could be stolen by fraudsters, and you could be in breach of a website’s terms and conditions by allowing a next of kin to use them to log into an account.

4. Make a Lasting Power of Attorney

A Lasting Power of Attorney (LPA) is worth considering as you get older. It could prove very helpful if you had an accident, a stroke or developed dementia.

It is a legal document that lets you appoint one or more people to look after your affairs, if you become too ill or lack the mental capacity to make decisions yourself. There are two types: property and financial affairs, and health and welfare. The former makes it easier for your attorney to access your assets, for example collecting your pension or managing a bank account, while the latter allows the attorney to make decisions relating to, say, medical treatment or moving into a care home.

It costs £82 to register one, although those on benefits or a low income may be able to get a discount or an exemption.

5. Plan for inheritance tax

If everything you own (including savings, investments and property) is worth less than £325,000, or you are planning to leave everything to your spouse or civil partner when you die, then you don’t need to worry about inheritance tax.

However, many people do need to think about inheritance tax. The government raked in £5.4bn in inheritance tax receipts in 2020-21, and the number of families paying the tax is predicted to nearly double over the next five years.

Anything above the £325,000 threshold is subject to 40% inheritance tax. You can cut the amount the taxman takes by planning ahead and reducing how much your estate is worth.

Gifting money to children or loved ones can be a simple way to do this - but watch out for the rules. You can give up to £3,000 in total each tax year, plus as many gifts of up to £250 per person as you want each tax year. This includes assets like property, shares and jewellery, as well as cash. You can also make certain gifts for weddings and civil partnerships. These gifts won’t be counted as part of your estate when you die. 

If you choose to give away more than this, it will be included within your estate for at least seven years. If you were to die within this period, and your estate is liable for IHT, the tax would be levied on a sliding scale, between 8% and 32%. If you survive for seven years after making the gift, no tax is due. 

Sean McCann says it’s important to keep a record of any gifts as this will make it easier for your family to complete the forms that may be needed before probate can be granted.

Regular gifts can also be made from your income, as long as they don’t impact on your normal standard of living.

Consider your finances as a whole when planning for inheritance tax. “For example, your pension is outside of your estate for inheritance tax purposes, which means if you were to pass away, your pension isn’t subject to inheritance tax,” notes Tom Kimche.

“Therefore, it may be worth using other assets for retirement planning before your pension, if you can. Gifting to children or other beneficiaries is the most cost-effective way of passing down your wealth, so it’s important to think about how and when you want to do this.”  

Another way to reduce IHT is via philanthropy. Leave everything above the £325,000 threshold to a charity or a community amateur sports club and there is normally no tax to pay. Alternatively, leave at least 10% of your net estate to charity and the rate of inheritance tax is lowered from 40% to 36%.

6. Think about probate

Probate is a legal document that the executor can show banks and other organisations to collect the deceased’s assets and share them out according to the instructions in the will. It can take a while to get probate, potentially causing stress as families wait to access a person’s money and assets.

However, probate is not always needed. For example, if you intend to leave everything to your spouse, and your assets are jointly held, such as in a joint bank account and you are beneficial joint tenants of your home, then probate may not be necessary. In this scenario, the deciding factor may be how much you have in individual savings, investment and pension accounts.

If you have less than £5,000 in each account, it’s very unlikely your executor will need to apply for probate. If you have more than £50,000 in an account, then it is likely it will be needed.

And what about amounts inbetween? Unfortunately, that’s a grey area as banks and financial institutions are allowed to set their own rules on how much money they can release before seeing a grant of probate.

If you have a solicitor or financial adviser, it could be worth checking to see whether your loved ones will need to go through probate, and if there is anything that can be done now to avoid it.