Royal London

It’s a family affair

Simoney Kyriakou

Content plus editor, FTAdviser

Family planning is not just about how to pay for 2.4 kids and a dog; it’s about creating sustainable wealth that can pass through the generations.

With an estimated great wealth transfer of $30 trillion from Baby Boomers to the younger generations, inheritance globally is big business.

Even in the UK, the sums set for inheritance are eye-watering: St James’s Place research shows there is a possible £2.8 trillion available for transfer over the next 30 years.

Making sure, however, that wealth is cared for now so it can be passed on is a vital task for the adviser. But it is not just passing it on but making sure the wealth is not frittered away but used to help family members succeed – this is why intergenerational planning is becoming ever more crucial.

Helen Morrissey, personal finance specialist for Royal London, comments: “Intergenerational pension planning will become increasingly important over the coming years.

“The issues around increased student debt, the decline of defined benefit pensions and skyrocketing house prices have been much discussed, and retirees are increasingly looking at ways to help their children and grandchildren get on a more secure economic footing.”

When viewed solely from an inheritance planning perspective, pensions should be kept intact for as long as possible. --- Martin Bamford

Indeed, the St James’s Place research suggests this wealth transfer of £677bn to the economy each year – roughly equivalent of 1.2 per cent of GDP – will be mostly spent.

Some 25 per cent will go into savings products, 40 per cent is likely to be spent on property and the remaining £410bn will be spent on goods and services – expect more Lamborghinis cluttering up the driveways.

Pensions flexibility

Where is all this money coming from?

A substantive part of this new-found wealth is from the accumulated pension pots of the Baby Boomers, along with their mortgage-free houses and second homes.

This means a core part of the need for intergenerational planning must start with pension advice.

Since the pensions freedom and choice regime came into force in April 2015, more advisers are being asked to help pass down pension wealth to subsequent generations.

According to Mark Dennison, principal of advisory firm LightBlue: “Flexibility in how pensions can be taken now makes it important for them to review their financial situations and make sure that the wealth they have created is passed down to their chosen beneficiaries in the most tax efficient manner.”

Martin Bamford, chartered financial planner for Surrey-based Informed Choice, agrees: “Pensions used to be solely for providing an income in retirement but have in recent years become just as important as a source of wealth for future generations.”

The rules on pension death benefits, which allowed pensioners to pass their wealth down in a more tax-efficient manner, has also contributed to this need for financial reviews.

As Ms Morrissey says: “This money can be paid into the pension of a beneficiary rather than as a lump sum, which means a retiree can be confident they have given someone else’s retirement income a much-needed boost.”

Mr Bamford adds: “When viewed solely from an inheritance planning perspective, pensions should be kept intact for as long as possible, with other savings and investments drawn down first.”

How to make the most of the freedoms

This is no small challenge. Neil Adams, head of pension planning for Drewberry Wealth, explains: “The challenge with this wealthiest of generations is to help them make the most of today’s pension freedoms.

It is hard enough to get everyone together for Christmas, so the idea generations of the same family can sit down with the same adviser and talk through their finances is still a long way off. --- Neil Adams

“For younger ‘baby-boomers’ this can mean consolidating multiple pension plans into one low-cost portfolio with bags of investment choice. It can also means exploring whether today’s bumper final salary transfer values present an opportunity not to be missed.”

He says putting a lifetime’s pension savings into one well-diversified portfolio that can be viewed on a single screen is a good first step to building a pension pot that will last clients throughout their retirement and beyond.

However, there is also the greater flexibility offered by income drawdown, which has surged in popularity since the pensions freedoms came in.

Mr Adams describes this aspect as: “Designing a durable programme of withdrawals based around each client’s unique circumstances and which includes sensible safety measures such as keeping a year or more’s income in cash to limit the risk of ‘pound cost ravaging’.

“It also means identifying when options such as impaired life annuities might come into play. All this means regular portfolio reviews and client relationships that can span decades.”

Taking control through life

But it is not just the Baby Boomers who need this advice: more people in the squeezed middle and even millennial generations are now saving into a pension.

This means intergenerational pension planning needs to start with younger generations who are still in the process of accumulation.

Philip Brown, head of policy for LV=, explains: “These days, people do not get the valuable benefits of final salary pensions, so it is vital they take control of their pension savings throughout their working lives, not just at retirement.

Intergenerational pension planning will become increasingly important over the coming years. --- Helen Morrissey

“Auto-enrolment means even more people are now paying into a pension, but it is important they continue to monitor and assess their savings to ensure they are adequately planning for what is likely to be a longer retirement than previous generations had.”

Add to this the need for proper stewardship and estate planning, as Mr Adams comments: “Intergenerational pension discussions should be central to the estate planning process, as should having a clear and up-to-date will in place.

“In an ideal world, this sort of approach would improve the stewardship of family pension funds, as an adviser would be more consistent in their approach to how the funds are invested.”

Careful considerations

However, pensioners who have accumulated wealth in their pension pots over many years do not want to think it could be frittered away in months by profligate offspring.

Moreover, just because pensioners can use drawdown to release cash from their pension pot to help pay for university fees or secure a deposit on a first home for their children, does not mean they should always do this without thinking of their own needs.

Ms Morrissey cautions: “While it is a good thing to help out younger generations, retirees must be careful they do not leave themselves at financial detriment,

“People tend to underestimate how long they are likely to live and their circumstances may change markedly.

“A period of investment volatility or a stay in a care home can deplete a pension pot, and what may have seemed like a sensible level of withdrawal at the time may now place someone in financial difficulties.”

Starting the conversation

Drewberry’s Neil Adams says it is vital that advisers encourage families to start thinking as soon as possible about intergenerational planning, but admits the discussion might be a little tense to begin with.

He comments: “For many of us, it is too uncomfortable to talk about someone else’s money, even if it is with our own parents or other family members.

“And for advisers, the reality is that we can’t be expected to heal a family rift or undo our social conventions.

“So we always highlight the intergenerational angle to older clients, but it is a difficult area.”

“For many families it is hard enough to get everyone together for Christmas, so the idea that generations of the same family can all sit down with the same adviser and talk through the intimate details of their finances is still a long way off for most British families.”

Simoney Kyriakou is content plus editor for FTAdviser

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