The need for intergenerational financial planning has never been greater. According to the Centre for Economics and Business Research, those in their 50s, 60s and 70s command almost 70% of all household wealth in the UK. Generation-to-generation wealth transfer is predicted to increase from £69 billion in 2017 to £115bn by 2027.
Whilst many clients recognise the potential benefit of using their resources to help their whole family, they find it difficult to openly discuss sensitive issues like inheritance and death with their loved ones and worry a possible inheritance may affect their children’s work ethic or relationships and have an underlying concern their children may divorce and see their lifetime’s work disappear.
The need for advice is obvious and the benefit of advisers are real but media coverage (Think Neil Woodford) and past experience can make them fearful of any pitfalls.
Stereotypical advice involves a “gap find questionnaire” designed to find a pot of money that allows a tedious sales pitch about better returns, saving tax or life insurance and in effect what clients hear is “how much money do you have” and “where is it”. A lady I met recently likened this to “financially undressing in front of a complete stranger”.
Many of our clients have high levels of income, assets and investments but still worry about not having enough money or not keeping what they already have.
Many come to us for advice about getting better investment returns, but unless we understand the type of lifestyle they would like now and in the future how do we know if:
- They could achieve all their financial objectives without taking any risk at all.
- They need a return which requires more risk than they are comfortable taking.
- They need to change their objectives, for example, spend less when they retire or work for longer.
In my experience, it is “not knowing” that causes many people to either invest badly or reduce their returns by paying more tax than they need to – and we regularly meet people in one of five situations:
1. They already have enough money but may not realise it and as a result:
- Keep doing a job they no longer enjoy instead of retiring to enjoy their hobbies or more time with their family and friends.
- Already be retired, but still worry about money.
- Not treat themselves or their family when they could comfortably afford to or feel guilty when they spend money.
- Take more risk with their investments than they need to.
- Read the finance section of a newspaper and worry when markets fall.
2. They do not have enough money to do everything they want to and may need to consider:
- Increasing what they save.
- Reduce their spending.
- Change their objectives, for example, work for longer or,
- Change the way they invest to achieve the returns they need.
3. They have more money than they will ever need
They can afford to do everything they want to; but may still worry about:
- Retiring early because they fear their money will run out.
- Retiring too late and not doing all the things they wanted to.
- Dying with too much money and overpaying inheritance tax but they are still afraid to spend money or give it away because they are unsure whether they should.
Not having a clear plan can mean they:
- Do not help their children or grandchildren when they can easily afford to and are alive to see the benefit and happiness it brings.
- Are still investing to make more money instead of protecting what they have.
4. Do it yourself investors
Having been tempted by advertising to buy top-performing funds they spend time looking through statements and valuations not knowing what to keep and/or ignore. They often watch the news or read a newspaper and may:
- Worry and ruin their peace of mind or,
- Invest in the wrong places and put their hard-earned savings at risk.
5. Business owners
Many are stressed and feel they do not have time for holidays or hobbies.
Knowing exactly what income or dividends they need can help frame their day-to-day plans or make them realise they can afford to sell their business for less than they thought.
Once our clients know what they need, they can talk to their accountant about strategies to reduce IHT such as transferring shares to their children, gifting patterns or setting up Trusts.
A four-step planning process
Step one: Understand their current situation, goals, worries and principles about money.
- The cost of their current lifestyle including necessities and fun
- The type of lifestyle they would like at a later date, for example, when they retire
- The things that might put their plans at risk, for example, illness or unplanned expenditure
- A later-life forecast, for example, considering the cost of nursing care, travelling less or giving their family more money.
- One-off costs such as special holidays, cars or helping their children get on the property ladder
- Any charitable giving whilst they are alive or after they pass away.
The money they have to fund their lifestyle and how long each source will last:
- Current income eg salary, dividends, rental income: when each one will stop and if they expect them to increase or decrease.
- Other income that may start later, for example, State Pensions or Company Pensions.
- How much money they can readily spend, e.g. savings accounts, ISAs, stocks and shares etc.
- Other potential one-offs eg downsizing a house, possible inheritances, company pension funds or a business to sell.
Potential inheritances may be reduced by parents living longer than expected and/or the cost of long-term nursing care and relying on downsizing a house is also increasingly common. The main point about planning is to know whether they are financially dependent on either as this can make a big difference to how to structure their finances.
These early meetings also help identify understand their motives for example their upbringing, illnesses, secret sorrow, family stories, concern about their children’s future relationships or principles about money.
Step two: Building a plan to identify:
- The level of return they need to do all of the things they want to. This may allow them to take less risk or consolidate and simplify your existing investments.
- The most tax-efficient way to structure their investments, savings and income & which money to spend first, for example, your pensions, savings or rental income etc.
Step three: Implementing whatever is needed
This may involve changing investments or simple steps such as putting assets into a Trust and helping agree how you would like money used if something happens to you eg:
- Tax knowledge can save money year after year and minimise the impact of tax on investment returns.
- Transfer assets: to decide how you would like your legacy distributed, manage potential conflict amongst family members, minimise inheritance tax and preserve your family’s wealth for future generations so your plans survive for the benefit of others.
- Directing you to financial experts – who can give you the help you need, for example, Accountants, Lawyers, Investment Managers, Professional Trustees, etc.
Step four: Monitoring your progress
Good financial planning evolves alongside our client’s lives as their lifestyle & attitudes change. For example financial events that affect their money, be that with their business, children, health scares and divorce or to help grown-up children with their own financial problems such as weddings, house deposits, their grandchildren’s education or setting up trusts for their children to protect money against divorce.
We can work collaboratively with your tax adviser, lawyer, or any other trusted advisers.
This article does not constitute advice. To find out more about inheritance tax planning talk to a Charles Stanley Financial Planner. Tax treatment depends on individual circumstances and may be subject to change in the future.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.