But this is not the only source of financial assistance as baby boomers, usually grandparents, are increasingly playing a massive role in the transfer of wealth between generations.
Recent research by Brooks Macdonald found £327bn is set to be passed on from baby boomers to around 300,000 younger potential clients over the next decade.
The research also found that 60 per cent of inheritors were not satisfied with their advisers and that an alarming 46 per cent of advisers do not have any relationship with their clients’ children.
So why are intergenerational wealth transfers an issue?
Robin Eggar, managing director and co-head of UK investment management at Brooks Macdonald, says: “It’s clear that in some cases there is a disconnect between what inheritors want from an adviser and what advisers believe they are looking for. With over £300bn set to be inherited over the next decade, and over 50 per cent of inheritors not sure they would use the adviser of their donor, the importance of closing this gap has never been greater.”
Generational differences
Kay Ingram, director of public policy at LEBC Group, expects the transfer of intergenerational wealth to become more challenging as generation X – typically classed as those born between 1965 and 1980 – age.
She says: “In the future, retirement is likely to be more challenging as generation X ages. They are the squeezed middle who have not benefited to the same extent as their parents from defined benefit pensions.”
Ms Ingram adds: “They also missed out on defined contribution saving for the early years of their career as, unlike millennials and generation Z, they did not have auto-enrolment.”
Key points
- Intergenerational wealth planning can pose problems
- There is unlikely to be help from the bank of mum and dad in the future
- Junior Isas can be helpful
This point is also echoed by Michelle Crowley, wealth planner at Succession Wealth.
She says: “People over 55 hold the majority of the UK’s wealth, accumulated through factors such as DB pensions, the long-term rise in the stock market and the boom in house prices. It is likely that property growth won’t be as advantageous for the next generation and most DB schemes have closed.”
Ms Ingram predicts the bank of mum and dad will run out of money, so baby boomers need to think carefully about how and when they pass their funds on.
Emily Griffiths-Hamilton, family enterprise adviser and author of both Build Your Family Bank and Your Business, Your Family, Their Future, says 70 per cent of intergenerational wealth transfers fail due to lack of communication and trust.
She adds: “Therefore, advisers and wealth management firms who take a proactive approach to assisting the baby boomer generation with the preparation of the upcoming generation – through activities like skilfully facilitating family meetings where families explore their shared values and vision and talk about the ‘purpose’ of their wealth – will find communication strengthened and trusted relationships not only being built with their advisers but oftentimes within the family itself.”
Using tax structures
Several industry experts stress that intergenerational planning is important to ensure wealth passes in a tax-efficient manner.
Steve Pennington, director and head of wealth planning at Arbuthnot Latham, says: “Intergenerational considerations are often best addressed through having a well-managed wealth plan. Professional advice is best sought early, in order to enjoy the tax allowances that are available to younger generations through structures such as Junior Isas.”
He adds: “Many family trust arrangements therefore include provisions that will only allow access to wealth at the discretion of more senior family members, acting as trustees. One of the key considerations of Jisas is that the beneficiary becomes entitled to the funds at age 18, so if families have been saving effectively over many years using this valuable tax wrapper, a significant capital sum may be available to quite immature young people who may not yet have the knowledge and experience to handle the money responsibly.”
Sarah Phillips, partner at Irwin Mitchell, says: “Mitigating tax to protect the amount of wealth that remains within the family unit, helping the next generation when they need it (rather than them inheriting at an unknown point in the future) or testing the financial responsibility of the next generation are all popular reasons [for intergenerational transfers].”
Ms Phillips says when passing wealth from baby boomers to younger clients, there are a few things to consider:
• Does the wealth being gifted need protecting in the hands of the younger recipient (in the event of divorce, financial difficulties or third-party influences)?
• If clients help some of their children more than others during their lifetime but have a wish to ultimately treat them all equally, are their wills structured to achieve this?
• Intergenerational wealth transfers give many tax planning opportunities for both parties, but there are also many traps for the unwary or ill advised.
How financial advice can help the next generation
Liz Palmer, partner and head of private wealth at Howard Kennedy, says environmental, social and governance investing should be a core focus in intergenerational wealth transfers.
She says: “The investment community’s interest in ESG issues is reaching a tipping point and that is because millennials in particular are forcing this up the agenda. If you want to advise the inheritors and have a relationship with them, then you need to prioritise these issues.”
She adds: “[Advisers] need to understand what drives the next generation and what their priorities are. ESG investing is a good example of this.”
Most commentators stress the importance of familiarising children with financial advice from an early age.
Mr Pennington says: “Often we encourage family members and their advisers to have roundtable discussions. The roundtable style of meeting helps clients to identify their own preferences and it allows for different generations to gain knowledge and understanding of the family’s position.”
He adds: “Families that own businesses are also very keen to introduce younger generations into their business environment, either through appointing them as shareholders or involving them as directors of the business.”
Saloni Sardana is a features writer at Financial Adviser and FTAdviser
