Paid post by Quilter Investors

Transferring wealth to the next generation

Pension freedoms have brought about new possibilities for passing pensions on to future generations. Three years on, Quilter Investors invited a number of leading advisers to discuss the consequences of this changing pension landscape.

Prior to the pensions reforms, an annuity would die with its owner but the transfer of pension assets is now possible and, in many cases, desirable.

Jarrod Ellis, adviser at Delta Financial Management, describes this as an entirely new avenue, compared to just planning for the client’s future, due to the flexibility and the wide array of investment structures available.

In such a sensitive area, planning what will happen to their assets on their death can require some client education. For example, the beneficiaries are unlikely to inherit a big pot of cash, instead they will more than likely inherit a pension pot with all the relating structures that they then need to address. The challenge, therefore, is to bring the entire family together and generate a culture of guardianship around those assets, rather than one where those inheriting think of it only as a spending pot.

Petronella West, CEO of Investment Quorum, explains: “We want to protect our clients’ wealth by getting children to take responsibility and seeing themselves as custodians of family assets, as opposed to the beneficiaries of those assets. It means that we can introduce intergenerational planning into the mix.”

Max King, charity executive at Epoch Wealth Management, adds: “We try and get wealthy individuals to bring in their sons or daughters or even their grandchildren to sit in on those conversations so they get a better understanding of the assets they’re going to be inheriting. It’s about getting them engaged and buying into the idea of that and the monies coming over to them in 20, 30 years’ time.”

One structure that has proved especially helpful within intergenerational wealth planning is the use of offshore bonds in family investment companies. West explains: “They’re proving to be a much more interesting way for families to pool their wealth into one investment strategy where they can decide when the children become shareholders. It’s not Business Property Relief (BPR), it’s not inheritance tax [mitigation], but it’s a way of transferring wealth.”

That said, there are other structures that allow for long term planning, beyond the actual term of the pension, which should be taken into consideration. Equities are often favoured as a way to beat long-term inflation and provide real returns within a portfolio.

However, for investors looking to receive a pension income while also planning to pass on some of their hard-earned savings, diversification of investments across geographies and asset classes is required to ensure a balanced portfolio with low correlation between the strategies. Anthony Gillham, head of investments at Quilter Investors, notes that while “an important core of your portfolio needs to be invested in real returning assets, and equities produce real returns”, there are other areas to invest in to bring this theme of real returns into portfolios.