Preserving your pension is no longer a viable IHT strategy

Making a financial plan and sticking to it requires time, long-term thinking and discipline. So when the government comes in and subverts the rules of the game, people find it understandably frustrating. This is especially true when it comes to strategies for reducing inheritance tax (IHT), as recent changes have made some previously popular tactics less effective.

Our reader, Alan, 73, and Ruth, 67, are facing this exact dilemma. With plans to downsize in the near future, they will have a significant amount of cash to reallocate. Their main objectives are drawing an income from their portfolio and reducing their exposure to IHT.

Currently, their portfolio consists of an Isa and a pension, with a focus on investing for income. While this approach can provide a steady stream of cash flow, it’s important to consider whether their investments are diversified enough to weather any market fluctuations.

Diversification is key to mitigating risk in a portfolio. By spreading investments across different asset classes, sectors, and regions, investors can reduce the impact of any one investment underperforming. This can help protect against losses and ensure a more stable long-term return.

In Alan and Ruth’s case, they may want to consider diversifying their portfolio further. This could involve adding exposure to different types of assets, such as bonds, real estate, or alternative investments. It may also be beneficial to review their current holdings and make adjustments to ensure they are well-positioned for the future.

In light of recent changes to IHT rules, it’s also important for Alan and Ruth to reassess their estate planning strategy. With the threshold for IHT frozen until 2026, more families may find themselves subject to this tax in the coming years. By working with a financial advisor, they can explore alternative strategies for reducing their IHT liability and ensuring their wealth is passed on to their heirs in a tax-efficient manner.

Ultimately, Alan and Ruth’s financial plan should be tailored to their specific goals, risk tolerance, and time horizon. By regularly reviewing and adjusting their portfolio, they can ensure they are on track to meet their objectives and secure their financial future.