Playing the financial generation game can be tricky

YOUNG people can no longer look forward to enjoying a more prosperous future than their parents.

Steady growth in incomes has been replaced by stagnation, with those born in more recent decades often less well off than mum and dad were at the same age.

According to Taxbriefs, which offers specialist financial publishing and client communication services to professional advisers and financial service providers, intergenerational financial planning has emerged to bridge the gap.

Typically, parents and grandparents are helping younger, less affluent family members get on the property ladder or start investing.

But, with longevity increasing, they have to be careful not to give away more than they can afford.

The Association of British Insurers recently warned that, if the current rate at which many people are typically withdrawing cash from their pension pots continues, future pensioners will be at risk of running out of money in retirement.

It is a tricky balancing act. Especially as money can cause family rifts.

Parents and grandparents need to agree and make clear whether the help they are giving is a gift or a loan and what, if anything, they expect in return.

Those doing the gifting also need to be encouraged to consider the impact on the recipient. Will paying off a student loan mean a grandchild does not have the incentive to work so hard? Is there a danger children start to rely too much on grandparents paying the school fees? Affordability is key.

A couple in their 60s with surplus income today may wish to be generous to their children and grandchildren. But if they needed social care later, or one died and so the household’s pension income reduced, would they regret having given away their money?

Also, gifting when family members are still quite young comes with the risk that their circumstances could change significantly.

Consider safeguarding the gifts made in the event that the younger generation experience a divorce, business failure or bankruptcy. Likewise if a grandchild develops problems, for example with drug or alcohol addiction, or is just bad at handling money.

Trusts can be used to ensure the money being gifted is only used for the purpose intended.

Another option for marrying couples is a pre-nuptial agreement. If, for example, one family is providing much more financial help than another, the pre-nup can recognise this, with some of the financial gift ring-fenced, protecting it from any financial settlement on divorce.

Tax considerations are a central part of intergenerational financial planning.

The inheritance tax (IHT) exemption for “gifts out of surplus income” is not well known, but can often enable wealthier families to pass on money tax efficiently.

Worth remembering too that gifts to a discretionary trust are chargeable lifetime transfers (CLT) where

IHT may be due. A potentially exempt transfer (PET) is where an individual’s gifts of unlimited value become exempt from IHT if they survive for seven years.

Therefore the correct, tax-efficient order, according to Prudential, is loan trust – if the money is not a gift but a loan – CLT and then PET.

The tax status of the recipient is also important.

A variation of a will that skips a generation can save IHT.

If the recipient is a non-taxpayer, it can also mean that future income and gains are taxed less heavily than if the gift is made to the intermediate generation who, in any case, may not need the money, and would have to pay higher rates of tax on the investment returns.

All of these discussions can be fraught with emotion, so take advice and get all the family round the table.

Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,

based in Solihull. Email: tlaw@eastcotewealth.co.uk The views expressed in this article should not be construed as financial advice