Liz Booth looks at the options for clients wanting to pass wealth down through their family
One of the major changes in the past couple of decades is that increasing number of families (and not just those from inherited fortunes) are looking for ways to share their wealth with other generations.
This is not just about how to pass the money on but how to make the best of it while all generations are still with us, and possibly with two generations living into retirement.
A study by St. James’s Place on intergenerational wealth and retirement planning has revealed that the number of families with multiple generations in retirement at the same time will exceed one million in the next 20 years.
Other experts point to retiring baby boomers, who remain sandwiched between elderly parents, often requiring expensive care and children facing university debt and spiralling house prices.
However, as M&G Wealth stresses: “Intergenerational wealth management challenges that notion and looks at how families can use their wealth more collaboratively to support each other during their lifetimes. This offers legitimate estate planning and tax mitigation opportunities, while providing the much-needed assistance to alleviate the financial burdens of everyday life.”
- One in three said they had used the same financial adviser as another generation of their family, or in-laws.
- One in five advised clients confirm they are "talking openly about inheritance, so we could plan for it as a family".
- Preparing for retirement is, overall, the most-cited reason for seeking advice across all generations (average 34%).
Starting the conversation
So, how can advisers take advantage of the opportunities for intergenerational planning, to grow and protect their client base and build a more resilient and future-proof advice business?
It seems that starting the conversation is often the hardest part. A recent poll by M&G Wealth of 160 advisers showed an overwhelming majority (81%) said it was them, rather than their clients, who were typically most likely to bring up the topic of intergenerational planning.
Having started that conversation, however, there are plenty of good arguments for advisers to draw on.
Based on the responses where women thrive on being involved in work they feel good about, their desire to be appreciated, trusted and liked, clients could benefit from a rewarding experience with a female financial planner
M&G Wealth sets out five key opportunities:
Making a will – This, along with the appointment of executors, should be the starting point. Make sure clients let the next generation know how they would like their assets distributed.
Expression of wish – If a client and/or their partner has a pension scheme, chances are that the adviser has ensured that an expression of wish has been completed and sent to the scheme. These are not normally binding but will generally be followed by the administrator.
Lasting Power of Attorney (LPA) – While no one likes to think about needing to pass control of one’s affairs to somebody else, the sad reality is that for many this becomes a necessity.
Gifting – Gifting is a very legitimate way of passing wealth on in a tax-efficient manner. Use the annual exempt amount of £3,000 and also the ‘normal expenditure’ exemption rules. Third-party pension contributions, for example, can help reduce an IHT bill, boost a child’s pension and simultaneously increase their net income if the child is a higher or additional rate taxpayer. HMRC requires form IHT403 to be completed following a person’s death to document what gifts the deceased made, which may fall in full or part outside of their estate. A tip is to complete the relevant sections on this form as the gifts are made, saving a lot of time and headaches later.
Keeping important paperwork safe – This may seem obvious but remind people that a loved one is going to have to deal with their financial matters after they die. A fireproof box is recommended.
There are other benefits of planning ahead for the next generation too.
Things to tell your client about pensions: For the past two decades, people have been able to pay in £3,600 gross into a pension regardless of relevant earnings. So, who could this benefit?
Retirees – As long as a client is under 75 (with enough pension lifetime allowance) they can still benefit from tax relief. Relevant earnings for most people is the income from their employment, but when retired they don’t normally have any. But the tax relief rules allow them to pay in £3,600 per
Thanks to basic rate tax relief, it’ll only cost £2,880 to get £3,600 in a pension. If you take your tax-free amount of £900 from this and pay basic rate tax on the remaining £2,700, you get £3,060. That’s £180 more than what you paid in to start with.
Children – If a grandparent had started to pay into a pension for a grandchild born in 2001, thanks to basic rate tax relief you get extra added to your contributions to personal pensions – currently to put £3,600 in a pension it costs £2,880. The extra £720 is basic rate relief that’s added to this. For the first seven years of the grandchild’s life basic rate tax was 22%, so it only cost £2,808 to get £3,600 in a pension.
Some 21 years of contributions mean that the grandparent has spent £59,976 to fund the pension and assuming that the pension has grown at 4% per annum, that grandchild would have almost £120,000 in that pension.
If the grandparent has an IHT issue, they have saved £23,990 in inheritance tax as well.
Currently the minimum pension age is 57 for that grandchild. By that age and assuming no further contributions and 4% growth, that pension will have grown to £491,000. If we go with the ‘traditional’ retirement age of 65, that pension would be worth £672,000.
Liz Booth is contributing editor of PFP