Some of us are brought up to believe that leaving a big legacy to our children is desirable. After all, doesn’t it demonstrate how financially successful we’ve been during our lives? Well, perhaps, provided we haven’t had to be miserly, turn off the central heating in winter, and never go out! But seriously, for some of us, spending the kids’ inheritance just doesn’t feel right. It may be important to us that we make our children’s lives more secure after we’re gone. One way people sometimes try to achieve this is by ring\u2011fencing certain assets. This may be feasible if the remaining assets appear sufficient to support spending throughout retirement.<\/p>\n\n\n\n
Ring\u2011fencing assets may not align well with the circumstances of many people who wish to leave a legacy. After ring-fencing, the remaining assets may not be enough to generate a fixed income that meets their intended level of spending. Some people may not have defined\u2011benefit pensions, which can affect how long their funds last. We don’t know exactly how long we’ll live. It’s very difficult to match spending precisely to lifespan. If we don’t want to risk running out of money, we’re very likely to leave something from our non-ring-fenced assets, whether we want to or not!<\/p>\n\n\n\n
As an example, suppose I live in a house worth \u00a3250,000, and I have a total of \u00a3500,000 of assets when I retire. Then, if I want to ring-fence the house to leave to my children, I would then be relying on \u00a3500,000 to support spending throughout retirement. Annuity rates are at historic lows. Depending on my comfort with investment variability, I may decide to invest in the market. I could go for a combination of income and growth, and adopt a drawdown strategy. Unlike an annuity, this will give me a low, but not a zero, probability of running out of money at some point. I would still want to keep lifetime risk within acceptable bounds. So I might choose to limit annual drawdowns to keep lifetime risk within bounds I find acceptable.<\/p>\n\n\n\n
However, suppose I don’t ring-fence my house. Then I’ll have an additional financial cushion. I may be able to release equity from my home if required. This would reduce the value of the eventual legacy. But it does allow me to drawdown somewhat more from my investments. This could reduce the chance of exhausting my funds, since equity release acts as a fallback. The risk of having to release equity from my home will be higher than the risk of my completely running out of money. But it will still be relatively low. But whereas completely running out of money is a disaster, releasing home equity is not. It’s just undesirable. It’s possible that equity release might not be required during my lifetime. In this case I’ll be able to leave the house plus cash.<\/p>\n\n\n\n
So rather than ring-fencing the house, I may consider it acceptable to have a high probability of leaving the house debt\u2011free when I die, if that gives me a better standard of living in retirement.<\/p>\n\n\n\n