Never before has there been such a big difference between the wealth of the UK’s older and younger generations. Many of today’s young people are struggling to accumulate wealth because of the rising costs of university tuition fees and rented accommodation, not to mention the increasing difficulty of getting onto the property ladder and saving for retirement. At the other end of the spectrum, thanks to generous final salary pensions and big increases in the housing and stock markets over the last few decades, baby boomers currently hold more than half of the UK’s private wealth*.
With such a pronounced divide, perhaps it is no wonder that there is currently an unprecedented amount of money set to cascade down the generations from Britain’s grandparents. Like most people, you probably want to pass on your wealth in a controlled and tax-efficient manner, making sure it goes to the people of your choice. You probably want to be around to see them benefit from the money too. If so, you need to start thinking about intergenerational planning. In this article we hear from financial planners Charles Blackwell and Mike Wardlaw to find out what it is and how to get started.
What is inter-generational planning?
Inter-generational planning involves taking steps to ensure a smooth transfer of your wealth down the generations in line with your wishes.
MW: Inter-generational planning is about passing on wealth to the people that matter most to you in the most effective way. When doing this we’ll look at tax-efficiency, control, timing, access, sustaining your standard of living, and protection – these all come into it.
It also involves introducing your beneficiaries to your investment manager or financial planner. This way, we won’t be strangers to them when you are no longer around – they will be left in good hands.
£5.5 trillion of wealth is set to be passed down the generations over the next 30 years.**
Families are complicated
Planning ahead is especially important with modern families, which can be much larger and more complex than those in previous generations.
CB: Families are very different these days. 30-40 years ago, you had your 2.4 children and two thirds of a dog. We now have second marriages and second families. If you don’t have a clear strategy there are a number of elephant traps that can swallow you up. For example, your son or daughter could get divorced and lose half of the money you gave them. So we need to plan carefully to make sure the funds end up where you want them to, and are used for the reasons you choose.
MW: An important part of inter-generational planning is to establish a family roadmap, with details of who your money should go to and how it should be used. This will help to ensure you remain in control of your finances and that your family aspirations are met.
Inter-generational planning is about passing on wealth to people that matter most to you in the most effective way.
Involving your family
Many people find it uncomfortable talking about money – especially with their nearest and dearest. But when it comes to successfully passing on your wealth, it is important to involve the rest of your family and to introduce them to your adviser.
CB: Nothing is more personal than discussing your personal finances with your children or grandchildren. But you need to keep your beneficiaries in the loop so they know what to expect, rather than leaving it until the last minute. Of course, some people may not want to share details of their wealth with their children – but why not? There is no reason not to, unless you plan on leaving it to someone else!
MW: We want to get to know your beneficiaries and help them in any way we can. Many young people don’t have the knowledge or connections needed to look after their finances properly, let alone put an inheritance to good use. They could also fall prey to unscrupulous financial advisers, or pay high fees for a service they don’t need. We also sit down with many clients’ beneficiaries to educate them on their personal finances. For example, we may talk them through the importance of saving and the many tax allowances available to them. We can also give them support on their investments, family protection, mortgages and much more.
You need to start early
With inter-generational planning, the earlier you start the more you can do – and the less chance of there being nasty surprises further down the line. You may also find you can afford to start passing on your assets earlier, rather than waiting until after you die.
CB: The earlier you start thinking about inter-generational planning the better. I have dozens of clients in their late 80s who wish they had given away more of their wealth when they were younger, and had been able to watch their family members enjoy it through the years. After all, it’s so much more fun giving money away when you’re alive. It’s no fun giving it away once you’re dead.
It’s so much more fun giving money away when you’re alive. It’s no fun giving it away once you’re dead.
By starting earlier, you could also pass on your money when your beneficiaries will need it most. People are living longer and many of us have inherited money long after we’ve finished needing it. We’ve already put our children through school and paid off our mortgage – we could have done with the money 20 years ago! But you need to know that you can afford to make the gifts. Clearly the first thing is your own security – food, utilities and so on. Next is the ability to enjoy life and have fun.
Lastly but importantly, inter-generational planning. It’s really important to emphasise that you do not sacrifice your own retirement for the next generation. You come first – it’s your money.
MW: A financial planner can give you a picture of the future if you do A, B, C or D. If you’re wondering whether you can go on more holidays or whether you can afford to pass on more of your assets now, you can see how these options could affect your finances. That’s the value of forecasting. A lot of people say, ‘I would have done more if I’d just known’.
You could save Inheritance Tax
As well as ensuring the smooth passing on of your wealth, inter-generational planning can also help to reduce an Inheritance Tax bill. This could mean more of your money going to your beneficiaries and less to the taxman.
CB: Inheritance Tax is usually charged at 40% of any assets in your estate above your personal allowance, which is currently £325,000 per person. There is also an additional £150,000 allowance for passing on the main family home to your direct descendants.
Inter-generational planning isn’t all about saving tax – it’s important to keep that in mind and not let the tax tail wag the lifestyle dog. However, Inheritance Tax can seriously affect the amount of money you are able to pass on, and you’ve probably already paid some form of tax on your money over your working life too. So it’s worth taking steps to reduce the Inheritance Tax bill if you can.
Inheritance Tax has been described as a voluntary tax because there are so many ways to reduce the bill – you just need to plan ahead.
MW: Inheritance Tax is also becoming a bigger issue for more and more people. Since 2009 the average UK house price has increased by 48.2% and the UK stock market has grown by 128.2%***. This means more people’s estates are exceeding the nil rate band and triggering Inheritance Tax bills. And yet, Inheritance Tax has been described as a voluntary tax because there are so many ways to reduce the bill – you just need to plan ahead and work with your beneficiaries to do it successfully.
Pensions can play a big role
More and more people are using their pension as a tool for passing on assets and potentially reducing an Inheritance Tax bill.
CB: Pensions now play an important part when passing wealth down the generations. In April 2015 George Osborne introduced important changes to the death treatment of pensions, and they can now potentially be used to give your beneficiaries a tax-free income. If you die before age 75, your pension can be passed on to a beneficiary and they won’t pay Income Tax on the money. If you die after 75, any income is taxed at that individual’s marginal rate. But regardless of how old you are when you die, your pension is exempt from Inheritance Tax – it’s outside your estate.
MW: Another advantage is that your beneficiaries can access the money in the pension at any age – they don’t need to wait until they reach 55. So they could use the money to pay off a mortgage or to fund their children’s education fees. This has changed how we look at passing on assets.
A lot of people are programmed to believe we should live off our pension in retirement, but for many people it should actually be the last thing you touch. If you can afford to maintain your standard of living with other assets that do form part of your estate, you may be able to reduce your future Inheritance Tax bill while leaving your pension to be passed on to your beneficiaries.
How we can help
At Tilney our experts work with people like you to reach your future financial goals, whatever they are – from achieving the retirement you want to passing on your wealth to the next generation, or simply saving as much money as possible. They do this by creating a personalised financial plan that takes into account your individual circumstances, goals and plans for the future.
Our clients appreciate the benefits of having a proper financial plan, and the peace of mind that it brings. This is why many of them also pay for the younger generations to work with a Tilney financial planner to help them get on the right track.
If you’d like to introduce your children, grandchildren or any other relatives to a Tilney financial planner, please get in touch by emailing email@example.com or calling 020 7189 2400.
This article was previously published on Tilney prior to the launch of Evelyn Partners.