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Generation gain

28 January 2016

Once upon a time, retirement planning was simple: not so for the baby boomers.

They are called ‘baby boomers’ because of the surge in births after the Second World War but the boom has proved to be an appropriate epithet for another reason: their relative wealth. Increasingly, however, that wealth is being shared by grandparents and offspring as part of an intergenerational approach to financial planning.

For the first time, baby boomers reaching retirement age have a greater share of the nation’s wealth than those aged between 16 and 44 – although there are two and a half times as many of the latter. This new research, from the Resolution Foundation think tank1, suggests that the gap will keep widening. It calculates that those entering retirement accounted for 17% of the nation’s wealth between 2006 and 2008; by 2010 to 2012, that had risen to 19%. The share held by those under 45, by contrast, fell from 20% to 16% – the first time their share has fallen below the older group.

Wealth is always likely to rise with age as greater experience brings promotion at work and the returns from savings and investments accumulate. But there are some particular reasons for the widening gap. First, and perhaps most important, is the housing market. Baby boomers were likely to have climbed onto the housing market early: in 1991, 67% of 25- to 34-year-olds owned their own home; by 2013/14, that had fallen to just 36%2. These baby boomers have reaped the benefits of soaring house prices, while those who have been well advised will have seen the value of their investments rise with the long-term strong performance of equity markets.

The older generation also had more secure employment with better pension provision. Today, 744,000 people, or 2.4% of the working population, work on zero hours contracts2; a generation ago, they were virtually unheard of. Unemployment among 16- to 24-year-olds now stands at 12.3%: in 1971, it was just 4.2%. In 1967, 12.2 million people belonged to a workplace pension; by 2012, that had fallen to just 7.8 million3.

Much has been written about the iniquities of this wealth divide, with headlines berating the selfishness of the baby boomers and accusing them of stealing their children’s future. But David Willetts, the former MP who now chairs the Resolution Foundation, highlights a more pertinent truth: ‘I do not believe that this shift is creating an intergenerational conflict. What we see instead is a considerable transfer of wealth from recent retirees down to their children and grandchildren, for instance by helping them to get on the property ladder.’

Indeed, today’s generation of baby boomers may be wealthier than their children can aspire to be but they also have far more calls on that wealth. They are funding their children’s (increasingly expensive) university education; opening their houses to them again whilst helping them with deposits and mortgages for their first homes – almost half of first-time buyers could have had help from parents or grandparents, according to the Council of Mortgage Lenders4.

Eóin O’Gorman, strategy adviser at St. James’s Place Wealth Management, believes that it is not just money that young people want from their parents: ‘They are increasingly turning to their parents for financial advice too. Intergenerational wealth management is now becoming much more important for all ages within the family.’

Indeed, baby boomers are also facing calls on their wealth from the older generations, too. Life expectancy has increased dramatically over the past three decades and there are already more than half a million people aged over 90 in the UK3.

While medical advances have helped us survive diseases like cancer, stroke and heart attacks, increased longevity together with a rising incidence of debilitating diseases like Alzheimer’s and other forms of dementia mean that demand for, and costs of, social care are rising.

The baby boomer generation may, then, be squeezed by the costs of helping their offspring make a start in life and their parents end theirs in comfort. But they are also facing expenses of their own. While their pensions may be healthier than their children can expect to receive, increased longevity means the funds will have to last far longer: a man retiring in 2014 can expect to live for an average of 18.6 years4, and a woman for 21.1 years – and life expectancy continues to increase.

These factors have combined to transform the business of financial and estate planning.

A generation ago, the focus would have been mainly on distributing wealth at death and the key concerns would have been to save enough in a pension to fund what was likely to be a relatively short retirement and to leave a reasonable nest egg for their children.

Today, distribution of wealth is more likely to happen before death and the key challenge for families will be to balance the needs of the three generations: education (for grandchildren as well as children), bearing the costs of helping children with mortgages, and preserving enough wealth to cover the needs of parents from retirement to death.

That requires a new approach to financial planning, an intergenerational approach which balances the benefits of the tax efficiency of a pension with the flexibility of ISAs as part of a portfolio of investments to meet long-term growth and income requirements. Recent pension reforms, which introduced greater freedom over how and when to access these funds on retirement, provide useful flexibility for this intergenerational financial planning; but it is vital to consider the needs of all the generations in deciding how to use pensions and other savings, as well as when and how to access them.

A collaborative, intergenerational approach, in which all parts of the extended family are educated, advised and consulted on ways to make the maximum use of family wealth, for everyone’s benefit, will increasingly become the norm. Far from being selfish, baby boomers are increasingly using their windfall wealth to make the future brighter for the older and younger generations..

 

1 http://www.resolutionfoundation.org, October 2015

2 http://england.shelter.org.uk/, March 2015

3 http://www.ons.gov.uk, October 2014

4 http://www.cml.org.uk, March 2015

 

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise.  You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are generally dependent on individual circumstances.

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