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Making this inheritance mistake will leave your retirement in tatters

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One in three people expect to receive a significant inheritance, but banking on that money to fund retirement can lead to a dramatic shortfall in later life. 

More than 40pc of those who expected to receive an inheritance said they were relying on it to pay their way through retirement, a survey commissioned by Hargreaves Lansdown, the stockbroker, found.

The rising cost of living for pensioners, spiralling care charges and longer life spans could leave many without crucial money they had relied on inheriting. 

The most common age at which 25 to 30-year-olds will inherit money is 61, according to the Office for National Statistics. But more than 13,000 people lived beyond their 100th birthday in 2019, suggesting their children may be well into their 70s before they inherit. 

No one can accurately predict how long their loved ones will live, unless they have serious health issues. 

Sarah Coles, of Hargreaves Lansdown, said millions of people could be in for a “horrible surprise” because banking on an inheritance was a risky game. 

“Life and relationships are impossible to predict, and people shouldn’t be gambling on getting a windfall to make ends meet,” she said.

Though it may be tempting to start planning how the money would be spent, there is a growing risk that offspring may receive less than expected from their parents. Extensive nursing care can cost £100,000 a year, which could shred through savings set aside for inheritance, Ms Coles said.

The weekly cost of nursing care has increased by 15pc, or £119, over the last five years to hit £909 in 2020, according to figures compiled for Telegraph Money by Quilter, the investment group. The cost of residential care has risen by 14pc, or £82, to £667 a week. 

Household costs have risen faster for pensioners than for the working population over the past decade, figures from the Office for National Statistics showed.

Meanwhile, pensioners’ average total income, after direct taxes and housing costs, has remained almost flat over the period. Income rose modestly from £319 to £331 a week, figures from the Department for Work & Pensions have shown.

Ms Coles said: “We can’t accurately predict how life will turn out for our loved ones. They might end up needing expensive care, or spending their money enjoying their retirement to the full.”

Alternatively, pensioners may decide to change their beneficiary or choose to spend their hard-earned money themselves.

Women were more likely than men to need their inheritance for retirement, the survey conducted by Opinium found. This is mainly down to the significant gender gap in pension savings, as women typically miss out on critical years of contributions when taking time off to care for family. 

Higher earners were significantly more likely to say they needed an inheritance to use as retirement income than basic-rate taxpayers, the survey revealed. 

Even when the inheritance does come through, people may find it hard to sustain a good lifestyle with it. The median inheritance received was £11,000, according to the ONS. However, consumer group Which?, has estimated that the price tag of a happy retirement is £305,000. Someone who wants a “comfortable” retirement would need at least £19,000 per year or £26,000 for a couple.

Death duties may also quickly erode the final amount that is paid through. Estates worth more than £325,000 are typically liable for inheritance tax of up to 40pc, although there is an additional £175,000 allowance for property left to children or grandchildren, and married couples can leave each other their allowances if they leave everything to their spouse.

This means those expecting a £50,000 inheritance could be left with just £30,000 if the taxman were to take 40pc. Inheritance tax has been one of HMRC’s most lucrative revenue streams, raising in £5.2bn in the 2019-20 tax year.