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Intergenerational Financial Planning is Good For All The Family

Posted by Claire Phillips, Financial Planning Director

The Financial Times recently published an interesting article about intergenerational financial planning. The piece considers the implications of our increased longevity for our long-term financial plans and notes the impact that this will have on areas like the inheritance we leave to relatives and on having the correct financial provision for care and support in a longer old age.

Increased longevity is becoming a salient issue for financial planners and will be one of the biggest personal finance challenges for our generation and the next. (I wrote a blog earlier this year about the dawning age of ‘semi-retirement’ which describes a demographic which has finished traditional, full-time work but has yet to reach old age or settle into the slower pace of total retirement.) There’s a good chance we’ll all live longer than our parents and with this increased lifespan comes a need to ensure that we have access to quality care and support in our later years.

Care like this costs money of course, as does the business of living our everyday lives. As we live longer, whether we need care support or not, this will have an impact on the amounts we are able to leave to relatives which may end up, as FT journalist Jason Butler puts it, being ‘constrained, curtailed or delayed’. Meanwhile, younger generations of our families can be left struggling with an array of financial challenges like buying a property, paying off tuition fees and needing to prepare for their own financial futures with adequate savings and pension provision.

Three Steps to Sound Intergenerational Planning

There are many ways that a longer life will change our society, but these points would be a good place to start if we want our financial wellbeing to keep pace with our extended lifespan, while also allowing us to use our wealth to help other generations when we choose. Butler suggests that “Taking an inter-generational approach to financial planning will be increasingly necessary to ensure that the right people in the family have the right assets, at the right time, and also minimise potential family conflict and disputes.” It can be difficult to talk frankly about money within a family and to address differing needs and preferences, but trust and good communication are vital. He goes on to say that we should work at developing a comprehensive approach and build a plan that works for everyone, highlighting three steps to follow.

Step one is to think about what criteria you would use to decide how your heirs inherit your wealth, for example whether it’s based on an even split or rather who need or would benefit from the money more.

Step two is to write a family financial mission statement to establish the principles on which family financial decisions are made. This is aimed at increasing communication and building trust by bringing all parties to the table and seeking to be transparent.

The third and final step, he suggests, is to create a family wealth diagram to capture the current financial situation of each family member, to help with the decisions. This is a common-sense approach to both the challenges of increased longevity and the implications it will have for intergenerational financial planning. The reason the article caught my eye in the first place is that, as lifestyle financial planners ourselves, at First Wealth we are uniquely positioned to help our clients with these three steps.

Modelling for a Longer Life

As with all great financial planning, our approach is to start by asking what our clients ultimately want to do with the money, and what it’s to be used for. In this instance, they want to be assured that they are going to have enough money in the future to continue their lifestyle, however long they live, and they want to know what opportunities are available to help them achieve this. They’re keen to understand their position in relation to gifting money, either now or in the future, to their family members.

To address this, we would build a lifetime cashflow model with them, to help work out if there are sufficient assets to be retained at this stage, or whether gifts can be made without fear of running out of money. The model will include the costs of full-time care in the future and highlight possible options, like the cost of a lifetime annuity to provide sufficient income to cover care support in later years.

Creating an intergenerational financial plan can help with inheritance tax planning but can also provide a way forward when people might be reluctant, for whatever reason, to surrender control of their wealth in their lifetime. There are other options regarding inheritance tax planning that don’t necessarily involve losing control and are legitimate tax planning vehicles that do not fall foul of provisions contained in various pieces of tax legislation, such as the Pre-Owned Assets Tax and the General Anti-Abuse Rule.

For example, there are several trust-based investments that allow a client to establish a trust fund outside of their estate, free of Inheritance Tax and provide an optional annual payment to the client if required. Alternatively, Business Property Relief investments mean that the money invested in them is free from Inheritance Tax after two years. Some of these also allow the client to take income or capital withdrawals on a regular or ad-hoc basis if required (although this can reduce the amount that benefits from this relief). All these plans are examples of allowing a client to have some access to capital if life expectancy is happily longer than expected. Other solutions include life insurance such as whole of life and gift inter vivos policies.

Planning for Every Eventuality

Once we have sat down with a client and come to fully understand their financial position and aspirations, we can put together a plan to work out how their wealth will be employed or gifted throughout their wider family in the course of their lifetime and beyond. The planning out of future gifting, who you would want to help out in years ahead, is particularly relevant with dementia on the rise and as the potential for losing our capacity for making informed decisions has increased as a consequence of the expectations of a longer life. We are strong advocates of both the Financial and Health and Welfare Lasting Powers of Attorneys and believe these are as essential to a client as having an up-to-date will. They help a client plan in advance what decisions they want to be made on their behalf, the people they want to make these decisions, and how they want them to be made. Dealing with the Court of Protection can be costly and time-consuming if these are not in place.  Whilst on the topic of the Court of Protection, any guidance we have in advance of planned gifting will help with any future applications to them, along with the lifetime cashflow model.

A longer lifespan is a great thing, and we should see it as an opportunity to be seized and celebrated rather than a burden to be borne. However, to do this we need to make sure that there is a robust financial plan in place which allows us to pass on wealth to younger generations in a way that matches their needs and preferences as well as our own, while ensuring we have made provision for the financial support necessary to enjoy our chosen lifestyle as long as we live.

Key Take-Aways

  1. Make sure you model how much capital you will need for the rest of your life, before drawing up a gifting plan.
  2. Write down a future gifting plan covering who you want to help, when, and what with.
  3. Talk to your adviser about trust-based planning opportunities and Business Property Relief for Inheritance Tax planning.

If you would like some help with your intergenerational financial planning, please get in touch.

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This document is Marketing Material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested

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