Financial planning transcends generational gaps and can have a huge impact on all members of a family unit.
By looking at the bigger picture of your family’s finances, you can achieve far longer- lasting outcomes than by focusing solely on one generation.
In this article we will explore the concept of intergenerational planning and give a few ideas on how this might be applicable to your circumstances using a typical scenario.
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What is intergenerational planning?
Perhaps the most common form of intergenerational planning is inheritance tax planning.
This is an attempt to minimise the impact of inheritance tax on your estate when it passes to your heirs, and is certainly important, but there are wider considerations than just minimising inheritance tax on death.
A more complete approach to intergenerational planning would include a much wider range of issues than just inheritance tax planning, including some or all of the following:
For clients’ parents:
- Assisting aging parents with their financial decision- making
- Discussions on the subject of death and who stands to inherit the parental estate
- Concerns over who looks after the parents if they lose mental capacity
- Funding any required care, whether at home or at a residential facility
- Reviewing existing investments, pensions and other plans to check continuing suitability, especially if a trusted adviser has retired or otherwise been replaced
For clients’ children or grandchildren:
- Making sure children are saving enough for their future
- School / university fee planning for children or grandchildren
- Helping the younger generations to buy their first property
- Educating the younger generations on the savings options available to them and making them aware of how much they can expect to generate from a certain level of input
- Providing financial support for younger children in the event of parental death
An example family
To illustrate how some of these issues can be addressed, consider an example client family:
In this example, Richard (54) and Susan (56) are clients of TPO. Richard’s parents, Gerald (78) and Elizabeth (74), had their own adviser until recently, but he has now retired and his firm has been bought by a large advice firm. Richard and Susan’s own children are James (23) and Rachel (14).
James graduated from university two years ago and is pursuing a career in a technology firm, while Rachel is still at school, about to start her GCSEs.
Richard and Susan approached their TPO adviser because they are concerned that Gerald and Elizabeth have not heard from their new adviser since the takeover, and they want to be sure their parents are well looked-after.
During the discussion, the conversation turns to James, who recently asked Richard and Susan to explain his workplace pension to him, and Rachel, who currently shows no real knowledge of the value of money.
Although Gerald and Elizabeth have had an adviser for many years, their portfolios have remained largely unchanged for some time.
Their income more than meets their expenditure, so the investments have always been earmarked for a rainy day, and they never discussed inheritances with their former adviser.
They have a will in place that leaves everything first to each other and then to Richard, but they have never discussed with Richard whether this is the best course of action.
After discussion with their TPO adviser, Gerald, Elizabeth, Richard and Susan jointly agreed that:
- Gerald and Elizabeth have a significant surplus of capital which is not earmarked for any purpose. After a cash flow forecasting exercise, they are also reassured that their capital is unlikely to be significantly reduced even in the event of several years in a residential care home.
- Richard and Susan have enough capital already for their requirements and do not need an inheritance. They would prefer that any inheritance benefit their own children instead.
- As a result, Gerald and Elizabeth will approach a solicitor for new wills, leaving their assets predominantly to James and Rachel. At the same time, they will put into place Lasting Powers of Attorney to allow Richard and Susan to look after their finances and make health decisions on their behalf should they lose mental capacity.
- TPO will take on management responsibility for the investment portfolios, charging for this as an extension of Richard and Susan’s existing family unit. From these portfolios, Gerald and Elizabeth elect to make an immediate gift of £20,000 each to James and Rachel, to assist with the purchase of a first property for each of them. Rachel’s £20,000 is to be held by Susan until Rachel needs this cash.
- It is worth noting however, although the capital would belong to Rachel following the gift, her mother could be responsible for it until she is 18.
James’ saving strategy
James is delighted to hear that his grandparents are giving him £20,000 towards his first house, but has no idea what to do with it until then.
He was anticipating a long wait before being able to afford a property, but with this cash he now thinks that perhaps he would like to buy a flat within the next three years.
Aside from this cash, he has very little in terms of personal savings, but he does put money aside in his employer’s pension scheme every month, which he assumes will take care of his retirement needs.
James asks Richard and Susan where he can find good advice about these issues.
As part of the normal service, Richard and Susan’s TPO adviser suggests bringing James in to their next review meeting for an introduction and a quick chat about his circumstances. During this conversation, James learns that:
Rachel is unaware of the positive impact that early savings can have on her financial future, and is more interested in trying to spend her inheritance as quickly as possible.
Although Rachel will have full legal control and access the money from age 18, as these monies are intended towards a property purchase, it is expected they will remain invested as a minimum until she is 21 (i.e. following the completion of University).
Richard and Susan are interested in getting help from TPO to educate Rachel on the benefits of saving from this fairly early age.
Like James, Rachel is invited to join part of a meeting with her parents to discuss her savings and to work out how she can be involved. In conjunction with both her TPO adviser and Rachel, Susan decides to:
Hopefully this gives you a feel for how wide-reaching intergenerational planning can be when carried out diligently.
As with so much else in financial planning, the long-term goal is ultimately peace of mind for both you and your immediate relations, whether younger or older.
If you would like to speak about any of the matters discussed in this article, please contact an adviser.
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Please note: the Financial Conduct Authority does not regulate tax advice. The contents of this article are for information purposes only and do not constitute individual advice.
- His time horizon for buying a property precludes investing into risky assets, and he should stay in cash instead. Richard and Susan’s TPO adviser introduces James to the Savings Champion website and shows him how to find the best available instant-access cash ISA rates, which are higher than those offered by James’ high street bank.
- He also learns about Lifetime ISAs, which are designed for young people saving for a property or their retirement, and he decides to look into that for some of this cash. James knows that the £4,000 that can be paid into this each year forms part of his overall annual ISA limit of £20,000.
- His proposed flat purchase can be assessed on various bank websites to give him an indication of what is affordable. Once he knows this, he can start his search in earnest and compare the repayment mortgage to his rent to see how much more (or less) he will need to spend on accommodation each month.
- Automatic Enrolment for pension saving is a good start but is unlikely to afford him the type of retirement lifestyle that he aspires to. James will have to consider saving more for his future, though he may ultimately decide to prioritise his property purchase for the time being.
- Although not part of the original discussion, James also learns more about his employee benefits, including excellent sick pay and a large lump sum paid out for death in service, which he decides to leave to his sister for the time being. This will become even more relevant once James has purchased his property.
- Invest the maximum each year into a Junior ISA for Rachel’s benefit, with the balance invested on Rachel’s behalf but held in Susan’s name
- Share the portfolio figures and performance data with Rachel when it comes through
- Talk from time to time about what she hopes Rachel will do with the fund, i.e. use it to buy a home at some point in future