Mind the generation gap - Brewin Dolphin

Mind the generation gapHow you can lend a helping hand

Contents

The financial challenge 4

Prioritising your needs 6

The value of gifting now 8

The difference you can make 10

The importance of astute planning 12

About us 14

You want your family to enjoy the best that life can offer. Securing your own financial future is a high priority, but so is helping your children and grandchildren to meet the same goal. You’re in a strong financial position, but worried about unknown future costs like long-term care and inheritance tax. Your children could well be successful, but university debt and sky-high property prices are making life harder for them than it was for you.

At Brewin Dolphin our experts can work with you and your family to develop tailor-made financial plans that make the most of your pensions, savings and other investments. Over 250 years of working with families has taught us that families that do best are the ones that plan ahead – not just individually but collectively.

We will do the hard work, building a financial action plan to help ensure you and your family have the security you need today and in the future. There is no way of knowing for sure what will happen, but having a plan will help put things in perspective. Understand tomorrow, and you can enjoy today.

The value of investments can fall and you may get back less than you invested.

No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.

Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.

4 Brewin Dolphin Mind the generation gap

The financial challenge

The financial pressures facing the modern family can be overwhelming – and they do not disappear with age.

As you move into retirement you are likely to be more financially secure than ever before. Mortgages have been paid off, children flown the nest and you may be benefiting from a pension that will pay you a generous income for the rest of your life.

That does not mean financial concerns are consigned to the past. Thinking of your own future, you might be concerned about care-home fees, inheritance tax (IHT) or how to set up a power of attorney should you be unable to manage your finances.

You may also be acutely aware of the financial pressures your children and grandchildren are under. They may have left home, sometimes long ago, but that doesn’t stop you worrying - and wanting to help.

Rising living costs, low interest rates and the struggle to get on the housing ladder are putting huge financial strain on generations younger than 50. Employees have suffered from unusually slow wage growth in the last 10 years. The dramatically changing pension landscape has also taken its toll, with a shift away from defined benefit schemes to usually less generous defined contribution plans. Given the high cost of school and university fees and rising levels of debt, even “well-off” families can feel their finances are out of their control.

Savings gapOlder people hold more wealth than younger people, both in financial terms as well as in their homes. This is nothing new. However, since World War II most people growing up in advanced economies have been able to correctly assume they will be better off than their parents. Now that positive income trend appears to have reversed.

That is, in no small part, due to a decline in saving among the younger generation. If things continue as they are, the younger generation are not going to be able to afford to retire when they want to.

Brewin Dolphin commissioned the Centre for Economics and Business Research to look at the trends in wealth and income in recent years. The Brewin Dolphin ‘Mind the generation gap’ Report highlights the struggles faced by younger generations trying to save, even those on higher incomes. Key findings include:

• A quarter of the UK population doesn’t save at all: 14% of those with an income of £100,000 to £150,000 and 21% of those with incomes above £150,000 save less than 1% of their net income.

• Some 55% of the population, and 43% of those with incomes above £50,000, think they do not put enough money aside for retirement, citing a lack of spare cash as the main reason.

• On average 18-44 year olds think that an income of £30,000 per year would be sufficient to afford them a comfortable lifestyle in retirement. They would need a pension pot of £725,000 to buy that income and the average expected size of this age group’s pension pot is just £175,000 revealing a shortfall of £550,000.

Younger generations recognise that they are not saving enough for retirement. More than 50% of those in households with an income of £40,000 to £45,000 think they are not putting enough money aside1. Even among those with incomes between £100,000 and £150,000, almost 30% feel they are not saving enough1.

This is not a result of a ‘you-only-live-once’ attitude. The number one reason given for not putting more aside is a lack of spare cash to save1. Younger generations want to save more for retirement – a good pension income is one of their most important financial goals - but don’t feel they have enough money to do so.

1 CEBR: Brewin Dolphin Mind the Generation Gap Report, October 2016

Mind the generation gap Brewin Dolphin 5

There is an obvious solution: parents and grandparents can support their children and grandchildren by gifting some of the wealth they have been able to accumulate over the years.

Taking back control of your family finances does not have to be difficult. Over the next pages we explain how we can help you establish your own family’s financial action plan.

Growing wealth for the over 55s - decreasing wealth for the younger generation

2008 2010 2012 2014

Aggregate wealth (£ million) 16-44 year-olds 55+

0

4,000,000

2,000,000

6,000,000

8,000,000

10,000,000

12,000,000

20%

10%

0%

30%

40%

50%

60%

70%

Growth of total wealth (%)

The harsh reality that this country faces, is that the ‘Baby Boomer’ generation will be

the last to enjoy a comfortable retirement unless urgent action is taken now.

Liz Alley, Divisional Director of Financial Planning at Brewin Dolphin

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1 CEBR: Brewin Dolphin Mind the Generation Gap Report, October 2016

2 Zoopla: Retirees sit on £1.3 trillion property goldmine, 13 October 2016

The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

The over-65s are sitting on estimated housing wealth of

£1.3 trillion2

UK households saveonly 6p for every pound against

15p in 19921Source: ONS, CEBR analysis


Prioritising your needs

It is taken as given that you would like to help your children and grandchildren as much as you can. So the obvious question is why haven’t you already taken action to shore up their finances?

Often the answer is simple: you know what you have got, but you don’t know what you will need in the future. You are unsure how long you will live and whether you will have enough capital and income to last. You do not want to hand over money to your children only to be forced to ask for it back later in life when your own finances run short.

That is why, if you want to create a successful financial plan to help your children and grandchildren, it has to begin with you. You need to establish what you want to do with your money now and what you might need in later life, what is available now in terms of capital and income and how you might need to invest in order to maintain your lifestyle in the future.

We can carry out a cashflow analysis that will provide a clear and detailed summary of your financial arrangements and help us to forecast your future needs. Your financial planner will be able to ‘stress test’ how different financial decisions, growth rate assumptions, inflation and other economic events might impact on your ability to meet your financial goals. This can help with all sorts of things from weekly budgeting to making sure you are using all your tax allowances to pension savings and ISA accounts.

Once you have clarity about what you require, you can establish how much wealth is left to pass on to future generations. Our experts will build a tailor-made financial plan that gives you clarity about your current and future situation and gives you the confidence to help your family now.





3 Assumes a 2% return (net of charges) on Margaret’s pension and savings. Her legacy for all three grandchildren incorporating the savings she makes in IHT could be worth £1,582,299 instead of £1,200,890. Please note this is just an illustration of the possible increase in Margaret’s legacy. The actual saving could be more or less than indicated here.

Case studyHelp yourself, help your grandchildrenMargaret is 62, retired with a pension annuity income of £45,000, of which she spends £25,000 on herself and saves the rest. She has an estate of around £1 million, roughly half of this is her home (un-mortgaged) and the rest is savings and investments. She has one son, Luke, aged 45, who has three children aged six months, three and 10 years old respectively.

Margaret already has an inflation-proofed pension, and receives more than she needs. She decides to account for emergencies by keeping £20,000 - one year’s expenditure - aside in the bank.

After careful consideration, Margaret decides that if she needed full-time care she would fund it by selling her home in the future. Based on the current value, £500,000 could fund residential nursing care for a number of years.

With her own needs taken care of, Margaret commits to giving £1,740 per month to her three grandchildren using a mix of Junior ISA and pension investments for each grandchild until they are 18 years old. By setting up a regular commitment in this way, these contributions would fall under the ‘normal expenditure out of income’ exemption – making the gifts immediately and completely free of inheritance tax.

Using the savings plan for all three grandchildren and incorporating the savings she makes in IHT could increase Margaret’s overall legacy by almost £400,0003.


The value of gifting now

Many people support their children and grandchildren financially by leaving a legacy when they pass away. But have you considered the advantages of passing on wealth to your family and friends in your lifetime?

Lifetime gifts can be a good way to assist your loved ones when they are most in need. You have the chance to make a real difference, benefiting younger generations now and in the future. You also get to enjoy seeing the ways your offspring benefit from your generosity.

With our help you could easily improve the financial position of your children and grandchildren without compromising your own retirement plans. We can help work out your potential financial needs in retirement and how much wealth you have available to gift to younger relatives.

When it comes to gifting it is important to think beyond the obvious: helping with one-off costs such as house deposits, car purchases or weddings. Providing ongoing financial support, for example by gifting money each year to go into a pension or invest in other ways, may be more beneficial. The younger generation is not putting enough money aside for retirement, not because they don’t want to but often because they don’t have enough money to do so, implying that their lifestyles are taking up too much of their income. Even if they are in a strong position financially they may be reluctant to commit more money to their pension because they are concerned that their children and their parents might need support – if not now, soon. Just like you, they need help organising their finances now and planning for the future.

Gifting money to a younger relative to top up their pension can substantially boost their income when they eventually retire. And paying into an ISA for a youngster can provide them with a useful financial head start in life.

Another benefit is that gifting wealth while you are still alive can save inheritance tax. We can work with you to structure the most tax-efficient plan for all your futures.

• Each tax year you can give away £3,000 and that gift will not be subject to IHT when you die.

• If a gift is regular, comes out of your income and does not affect your standard of living, any amount of money can be given away and ignored for IHT.

• It is possible to make further tax-free gifts – known as ‘potentially exempt transfers’ – but you have to survive for seven years after making the gift to get the full benefit.

• You can give away most assets including cash, shares and property, but it must be an outright gift from which you can no longer benefit4.





4 The Money Advice Service: Gifts and exemptions from Inheritance Tax


Whilst we may be a challenged nation when it comes to savings, we are also a generous one when it comes to passing on wealth. However, often this wealth is being transferred in an inefficient way, as only a tiny percentage of people have thought beyond one-off gifting with their inheritance tax planning.


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The difference you can make

You could make a huge difference to a child or grandchild’s life by making regular contributions to a Junior ISA or pension.

By helping your younger offspring to save now, they can benefit from compound interest and compound returns on their investments – something that might not be possible if an inheritance is received later in life.

The effect of compounding on long-term investment growth could be particularly beneficial to your grandchildren who have longer to save. By making the most of your grandchildren’s pension and ISA tax allowances you could set them up for life.

Your children can benefit too. The greatest gift someone in a strong financial position can give to a member of their family is to ensure they have a financial plan. Our experts can assist them to clarify clear and achievable long-term financial goals. This can be used to answer questions such as how much money they need now and how much they will need in the near future and through retirement and how much it will cost to achieve this. Among the things we can help with are advising on using money in tax-efficient ways and investing money in the most effective way possible.

Our experts can work with you and your loved ones to tailor make a family financial plan that meets all your needs. All in all it will make the future feel less daunting.





The goal here is twofold: ensure our older clients are comfortable in the knowledge that they have sufficient funds to enjoy a comfortable retirement. Second, they put in place a strategic financial plan that through regular contributions builds two funds for their grandchildren: a ‘Life’s Events fund’ to cover big one off costs like a house deposit and a ‘Later Life fund’ to help close the large pensions gap they face when they retire.


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The importance of astute planning

Everyone’s circumstances are different so it makes sense to seek out expert advice tailored to your situation. Our experts can work with you and your family members to develop personal and precise financial plans that help you focus on making the most of your pension, savings and other investments.

We will cover all the bases so that you can look forward to the future with confidence, including considerations such as…

Power of attorney and will planning Six out of ten UK adults don’t have a will5, even though it is one of the most important things you can do to ensure your estate goes to who you want and your wishes are carried out as you intended. Setting up a power of attorney can also give you and your family peace of mind by ensuring a trusted friend or family member will be able to manage your affairs if you are no longer able to.

Modelling the future Our financial planners can help you with cashflow analysis. This will analyse your future cashflow position, providing reassurance that you have enough money to fulfil your needs and any surplus cash that you can pass to younger relations now. It will help us develop a financial plan for your future. Your priorities and financial circumstances can shift over time so we will monitor your plan regularly to make sure it always meets your needs. We will do the hard work, taking account of all your other commitments, to develop a holistic plan that works for you.

The value of lifetime gifts Gifting assets now can help improve the financial position of your loved ones and save inheritance tax. Gifts out of income are particularly useful. If a gift is regular, comes out of your income and does not affect your standard of living, any amount of money can be given away and ignored for IHT.

Investing on someone else’s behalf You can make pension contributions of up to £2,880 a year on someone else’s behalf. Tax relief turns a contribution of £2,880 into £3,600. Anyone can invest up to £4,080 a year into a Junior ISA for a child under the age of 18.

Pensions as an estate planning tool Pensions are one of the most tax-efficient ways to pass on your wealth so it might make sense to use other investments to provide a retirement income and retain funds in your pension as part of your succession planning. Provided pension death benefits are written in trust they are not liable to inheritance tax. If you die before the age of 75 benefits left in a money purchase pension can be paid as a lump sum or drawdown income to any beneficiary with absolutely no tax to pay. After 75 they will be taxed at the beneficiaries’ marginal income tax rate6.





5 The Co-operative Funeralcare, The Cooperative Legal Services, 3 November 20156 Gov.uk Tax on a private pension you inherit, 6 April 2016


Moving forward

• First think about how you want to live.

• Get a plan – for now and the future.

• When you’ve established a plan for yourself, think about the difference you want to make to your loved ones’ lives.

• Think in terms of objectives not sums of money.

• Consider giving money on a regular basis, not a lump sum, to maximise the benefits of compound interest and reduce tax.

Coming soon...In part two of the Brewin Dolphin ‘Mind the generation gap’ Report we will look at how the younger generation’s university debts place a huge burden on their income for years to come. If a family member can help, this would reduce the need for a new graduate to enter their working life with significant levels of debt.

Moving forward


About us

We are an independent and award-winning wealth manager, specialising in creating bespoke financial plans and investment portfolios for individuals, charities and pension funds.

Brewin Dolphin was founded in 1762 on the belief that the successful management of wealth takes an understanding of money but is rooted in an even deeper understanding of people. Even with today’s technological advantages, we continue to believe that the best way to understand your needs is to invest time with you. It is only by understanding your personal ambitions and aspirations that we can create and execute a strategy that will truly achieve your goals. Placing such a premium on personal relationships, we have built up a network of 28 offices across the UK, Channel Islands and Ireland.

As one of the largest independent wealth management companies not tied to any banks or fund managers, we have made a very deliberate choice to have no in-house funds or products. This gives our advisers full independence in how they craft personal advice and investment strategies for clients. Our own independent in-house research team

develops its own unconstrained views and insights on markets, funds, asset classes and individual companies, which our client advisers can draw upon to best manage your wealth.

We believe that only with an approach like ours can wealth management advice be truly bespoke.

To speak to one of our financial planners, call 020 3201 3900 or contact your local Brewin Dolphin office and we will be delighted to help you.

BD1976 11/16

Brewin Dolphin Limited is a member of the London Stock Exchange, and is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number: 124444). Registered office: 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales – company number: 2135876. VAT number: GB 690 8994 69

Mind the generation gap - Brewin Dolphin

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