The legacy you leave behind: how you shape the future of your loved ones
Life’s challenge lies in knowing what mark we want to leave, how we want to be remembered and how we are going to shape the future of our loved ones... because the legacy we leave can go far beyond our lives. Our legacy is as important as that left to us by our forebears, including what we learned from them, their life stories and their education. In the same way, we have an impact on those around us and on the generations to come.
That’s why working, raising a family or bettering oneself is not enough. All the effort and excitement goes beyond your career or achievements, even the family you have built. The key is instead to focus on organising your future and that of your loved ones.
Life is unpredictable, so think ahead, leave all the loose ends tied up to protect the future of your loved ones. We do not know what lies ahead, but we are clear about what matters. We can take steps now to protect what is important to us. Any decision that allows you to plan ahead will be the best reward for the future. And this is where life insurance and pension schemes, come into play. They are ideal solutions to leave your loved ones in good financial shape.
Benefits of taking out a life insurance policy to protect your family
One of the main benefits of life insurance is financial support for your loved ones. Family members are usually the beneficiaries of life insurance policies and receive compensation when you are no longer around or unforeseen events take place.
By taking out life insurance, you ensure that, in the event of your death, your family will receive an insured sum that will help them maintain their standard of living. Another crucial aspect of leaving your family in a good position is settling debts and financial obligations. Many people have outstanding loans, mortgages or other debts that could become a burden on their family members if they die. By having life insurance, you can ensure that your debts are covered by the insured sum.
Finally, there is the peace of mind and security of knowing that you have done everything possible to ensure the financial well-being of your loved ones.
The advantages of having a pension scheme for the future
Pension schemes are a solution with dual advantages. Without a doubt, a pension scheme allows you can maintain your standard of living during retirement and improve your pension, but it is also a guarantee for the future for your loved ones when you are no longer around.
Although pension schemes are designed as a way of saving for retirement, the death of the holder triggers the right to redeem the scheme, so the heirs can cash in the scheme either in a lump sum or in the form of an annuity, and without paying inheritance tax in either case.
It is worth noting that from January 1, 2025, pension plans can be withdrawn without needing to justify any contingency, as long as the contributions are at least ten years old. Additionally, remember that pension plan are considered employment income and are subject to the corresponding tax rate under the beneficiary's personal income tax (IRPF). It is crucial to analyze the tax implications before making a pension plan.
The inheritance you leave behind
The mark we leave is indelible. Everything we do will shape the inheritance we leave behind, an inheritance that is both material and immaterial. For this reason, it is vital to put certain procedures in place to avoid headaches for our families once we are no longer around.
Last wills and testaments are the best way to leave your estate, assets and last wishes in writing to guarantee the protection of your family. A declaration of heirs determines who will receive the deceased person’s assets, rights and obligations. There are several important reasons for making a will:
- Clarity and security: By putting your wishes and decisions about the distribution of your assets down in writing, you avoid misunderstandings and conflicts between your family members or heirs.
- Protect your loved ones: Protect the interests of your loved ones and ensure that they legally receive what you want. This can include estates, properties, life insurance or any other types of assets.
- Avoid legal expenses and delays: If there is no will or declaration of heirs, the asset distribution process can be more time-consuming and costly. The need for lawyers may result in additional expense, as well as considerable delay.
- Choosing a guardian or custodian: If you have young children, a will can be crucial in naming a legal guardian or custodian in case something happens to you. This ensures that the person of your choice is responsible for their welfare.
- Fulfilment of personal wishes: Through a will, you can express specific wishes about how you would like your possessions, investments or assets to be handled in the event of disability or death.
- Optimise taxes: In some cases, a well-written will can help to minimise the tax that needs to be paid by your heirs.
- Peace of mind: Making a will and putting your last wishes in writing can give you peace of mind, knowing that you have done everything possible to ensure that your wishes are respected and that your loved ones are cared for after your death.
Saving for my family
If you are someone who considers all the possible scenarios, who is far-sighted and likes to be ready for any eventuality, someone who does not leave things to chance and wants to protect their loved ones, or if you have decided to start adopting better habits, you can also leave your savings to your family, so that you do not need to worry and can be sure that whatever happens, your loved ones will be protected.
Savings can be used to help your family in the future and there are many ways to do this, whether you are the holder of a pension scheme or you have chosen a life annuity. We will tell you how.
How can someone inherit a pension scheme?
When you are no longer here, your loved ones will be able to inherit your pension scheme because you can include two types of beneficiaries to be covered in the event of death.
- Specifically appointed: The holder specifies who is to inherit the pension scheme and determines the proportion, if necessary. The names on the will are also valid.
- Not appointed: The rules of the pension scheme may determine who the beneficiaries are (usually the legal heirs, such as children and spouse). In the event of inconsistencies between the beneficiaries of the pension scheme and the will, the document with the most recent date will prevail over the other.
How can someone inherit a life annuity?
Life annuities can be inherited in different ways: first, you can specify two holders and, in this case, the monthly annuity will be divided between them, half each, and paid for as long as either of them lives. Each holder will be subject to the appropriate tax withholding.
Second, you can appoint an heir in the event of death in the policy. In this latter case, there are two options: the entire capital sum is paid as a lump sum, usually a percentage of the funds deposited, or as an annuity or percentage of it.
How does inheriting a pension scheme or life annuity affect my taxes?
Tax-wise, when a beneficiary inherits a pension scheme, the amount inherited must be included as earned income in the Income Tax Return. In other words, if you receive the savings as a lump sum, your taxable base could increase in such a way that you will have to pay the top tax rate of 45% (or even 48% depending on the region where you reside). In this case, no Inheritance and Donations Tax is paid on it.
If it is received as a life annuity and one of the holders dies, the other holder will have to pay l Inheritance and Donations Tax, and will continue to receive the entire annuity without applying the withholding to the other half. Once all the holders have died –if the cover for death had been taken out–, the capital sum will be paid to the beneficiaries.
