It is becoming increasingly clear that there is a generational wealth gap in the UK.
Generally speaking, the economy has been kind to those born in the years immediately after the Second World War, and in the 1950s, but less so to other generations, especially those born in the 1980s and 1990s, many of whom find it harder to get jobs and to gain a footing on the property ladder. Consequently, many parents are having to support their children financially well into their adult lives.
While our children may be struggling with their finances, our parents are typically living longer. This has led to an increase in the need for residential and nursing care, which is likely to be financed from accumulated savings, the sale of property, or with support from close relatives. 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 members.
With the right advice, transferring wealth to others in your family can be extremely rewarding, offering simple ways to reduce or eliminate a future Inheritance Tax liability. At St. James’s Place we provide the expert advice and the solutions that enable families to work collaboratively to support each other across the generations. Whether you would like to help your children on to the housing ladder, contribute to a grandchild’s education or wedding, or help your parents with later-life planning, careful consideration can ensure your wealth works harder for all your family without putting your own security and retirement at risk.
Feeling the squeeze
Those born after 1980 – the so-called ‘millennials’ – are the first post-war generation not to start their working years with higher incomes than their immediate predecessors1, challenging the notion that each generation will do better than the last. The financial crisis was a watershed moment; young people experienced the biggest pay cut in its aftermath, and if current economic forecasts turn out to be correct, they will make much slower progress on pay than previous generations.
Furthermore, by their early 30s, those born in the early 1980s had an average net household wealth (including housing, savings and private pensions) of £27,000 per adult. This is about half of the average wealth of those born in the 1970s at around the same age (£53,000).
Accepting that many young adults will go on to enjoy rewarding careers in their own right, many are not expected to inherit wealth until much later in their lives. Consequently, some parents with the financial means are starting to consider safely transferring assets to children within their own lifetimes – and while they still have the opportunity to see them benefit. This may be to help them gain a foothold on the housing ladder, clear debts, or build a fund for retirement.
Younger generations are technologically savvy and their lives tend to be dominated by social media, but this is not a place where they want to make life decisions. Instead, they overwhelmingly see their parents as the primary source of advice on financial planning1. Consequently, as older generations discuss transferring wealth to children and grandchildren, they might also want to pass on virtues about managing money, equipping them to make sound financial decisions long before they have to do so themselves.
As families continue to grow and diverge, it becomes ever more important to reach out to all members so that they can understand and be actively engaged in wealth management decisions made on their behalf. 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 wealth may be returned in some form in the future, perhaps to support your own care needs. St. James’s Place offers young adults and their parents, both individually and collectively, advice and support that takes into account both the family’s near-term objectives and its long-term vision – and offers help for parents who want to involve their children in all aspects of wealth management.
In addition to passing on knowledge, there are various ways to pass on wealth, and that is where effective estate planning comes into play. Thoughtful estate planning helps you preserve your wealth and pass it on to your designated beneficiaries in the manner you choose, while reducing your taxable estate. One of the easiest ways to transfer excess capital during your own lifetime is by gifting. The rules allow gifts of up to £3,000, free of Inheritance Tax, every tax year, and small gifts of up to £250 to as many people as you like. This money moves immediately out of your estate for Inheritance Tax purposes – you don’t have to survive for another seven years, as is usually the case with larger gifts.
The rules for ‘normal gifts out of income’, however, allow wealth to be passed down on a much greater scale while remaining exempt from Inheritance Tax. The gift(s) must be part of a regular pattern – monthly, quarterly, annually, perhaps – and must come from income, not capital. Parents could, for example, set up a Junior ISA for a child and add to it every birthday; or they could make regular gifts to help them save up for university fees.
Equally, gifting could help a child to build a solid pension pot of their own. With the earnings of younger workers lagging behind previous generations, investing into a pension in the early years is arguably more crucial today than it has ever been. The key consideration with gifting from income is that, having made the payment, the donor must still have enough income to sustain their normal standard of living.
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 dependent on individual circumstances.
Intergenerational Wealth Management can unlock the answers to the UK’s widening generational wealth gap; it’s about making the most of available tax allowances and estate planning strategies to ensure the family’s collective wealth works harder for the benefit of all.
So, whether you’re looking to help younger family members onto the housing ladder, contribute to a grandchild’s education or wedding, or help an older relative with later life planning, we have designed a range of family-oriented products and services that enable the generations to support each other and work collaboratively.
If you would like to start a conversation about how Intergenerational Wealth Management could help you and yours, please do not hesitate to contact me by calling 01803 313525 or by email at email@example.com
1 BNY Mellon, The Generation Game: Savings for the New Millennial, 2014