The generation game
Prudent financial planning should cater to the needs of all the members of a family, from the youngest to the oldest.
When the Queen turned 90 on 21 April, she served as a very public reminder of how much longer, as a society, we are living. In her own family, four generations are now all alive at the same time, from the Queen herself down to her latest greatgrandchild, Princess Charlotte. An increasing number of families now find themselves in the same position, which has implications for financial planning.
As a nonagenarian, Her Majesty is far from alone. The number of people over 90 years old rose by a third between 2002 and 2012, according to a report published by the Office for National Statistics in 20151. It also says that the number of over-85s in the UK is likely to more than double by 2039, to 3.4 million; longevity and the multi-generational family are here to stay2. Another key phenomenon that is changing is how we manage our wealth against the backdrop of a growing generational wealth gap. The economy was kind to those born in the years immediately after the Second World War, and in the 1950s, but less so to those born in the 1980s and 1990s – the so-called ‘millennial generation’ – who are finding it harder to get jobs and to get onto the property ladder. It means many parents are having to support their children financially well into their adult lives.
While our children are struggling with their finances, our parents are living longer. This has led to an increase in the need for long-term care, which is likely to be financed from accumulated savings, selling the family home or with support from younger generations.
These pressures mean that financial planning is becoming a family business. Instead of each generation making their own arrangements, families are starting to consider how to use their combined resources in the best, most tax-efficient way to benefit all its members.
A traditional trust structure – where the benefactor retains some control over the assets – can be used to achieve some of these aims, as well as to give family members a regular income in a tax-efficient way. But as the need for intergenerational wealth management becomes more widespread, people are using other means to share wealth efficiently up and down the generations.
Financial support need not be in the form of a handout; it can become an integral part of generational financial planning, and be undertaken in such a way as to reduce Inheritance Tax (IHT). Family wide protection is available at preferential rates. And it is now possible to help a child with a mortgage without committing any of your own capital.
One of the easiest ways to pass money between the generations – without being subject to IHT – is by gifting. HM Revenue and Customs rules allow gifts of up to £3,000, free of IHT, every tax year, and small gifts of up to £250 to as many people as you like. This money moves immediately out of the estate for IHT purposes.
The rules for ‘normal gifts out of income’, however, allow wealth to be passed down on a much larger scale. The gift(s) must be part of a regular pattern – monthly, quarterly, annually, perhaps – and must come from income, not capital. Grandparents could, for example, set up a Junior ISA for a grandchild and add to it every birthday; or they could make regular gifts to help them save up for their first car. The key consideration here is that, having made the payment, the donor must still have enough income to sustain their normal standard of living.
Some of us wish we had put more into a pension when we were younger. Regular gifting can help a child to build a solid pension pot of their own.
One of the biggest challenges facing the millennial generation is how to save enough for a deposit on a first property. More than half of UK first-time buyers in 2014 were given a helping hand by ‘the bank of mum and dad’, according to the Council of Mortgage Lenders2. Parents can (and do) help their children to save for a deposit, but they can also help with funding the mortgage. It has always been possible to help a child onto the property ladder by acting as a guarantor for their mortgage, but not everyone was happy to take on that risk.
Now, however, some mortgage providers will allow parents to be part of the mortgage process without having to put their names on the title deeds, removing the potential liability for any default.
Some lenders will take a combination of the parents’ and their child’s income into account before calculating the maximum loan available. The higher the combined income, the higher the potential loan. Others will ring-fence some of the parents’ assets to increase the size of the deposit which, because it lowers the loan-to-value ratio, thereby reduces the mortgage payments.
Wealth management is as much about protection and preservation as it is about growth and distribution. Many people in the UK are thought to be underinsured, particularly the young – who will often turn to their parents for support when they suffer a loss. Insurers are now designing intergenerational insurance policies that can meet the needs of an entire family, while they benefit from preferential rates.
If the young are more likely to underinsure their property and effects, they are also less likely to have life insurance. On the same principle as these new general insurance plans for families, group life policies are becoming available. Historically, the older generation might have understood the virtues of life cover, but the fact that they had no insurable interest meant that they were unable to buy a life policy on a child’s behalf. The new group policies address this problem.
The older generation may also need support, as they increasingly need to be cared for. If a parent or grandparent moves into a care or nursing home – unless they enjoy a very high net income to pay the fees – this will have an effect on the next generation, who will inherit less. How should residential care be funded, and can they avoid selling their home? With careful planning, these issues can be managed.
Whatever the context, all financial planning should include making a Will and a lasting power of attorney. Not only does this avoid unnecessary delay and complication on death – or in the event of a family member becoming incapacitated and unable to take decisions for themselves – it’s also a useful way of starting a conversation about wealth, particularly in families where talking about money does not come easily.
When planning how to dispose of wealth it is good practice to include all family members in the discussion, wherever possible, as this will ensure clarity and mutual understanding, and help to prevent family disputes. But there is another good reason for involving all family members – intergenerational planning is not, ultimately, a one-way street. Even as you support your children, the understanding is that the transfer may be returned in some form in the future, should you require it – perhaps for your own long-term care costs.
1 National population projections for the UK, 2014-based, Office for National Statistics, 2015
2 www.cml.org.uk, 2015
A home on which the mortgage is secured, may be repossessed if you do not keep up repayments on the mortgage.
Trusts, Wills and powers of attorney are not regulated by the Financial Conduct Authority. Wills and powers of attorney involve the referral to a service which are separate and distinct to those offered by St. James’s Place.