While every client I meet is unique, many share the same financial concerns. Will I have enough to live on when I retire? Will my family be financially secure if something happens to me? Will I be able to leave a legacy to my children and grandchildren?
Many clients are fully aware of this last point, and of the benefits of intergenerational planning. Including children in family financial planning can be hugely beneficial, as it can help to ensure that the right people in the family have the right assets, at the right time.
Providing your children with money now to go to university and buy a home may be much more useful than leaving them a lump sum on your death – and it can also have tax benefits. Taking this approach can also help to reduce the potential for family conflict and disputes.
In recent years, this approach has become ever-increasingly important. Clients who have benefited from generous Final Salary schemes, reasonable economic growth, homeownership, and booming house prices have more wealth than any previous generation, and so need better advice and guidance as to how to manage – and pass on – this wealth.
While there’s a keen awareness of how to deal with the generations below, clients often overlook the significant benefits of planning alongside the generation above. If you have ageing parents, it can be just as important to tackle planning on an intergenerational basis with them, to ensure they have enough to live the life they want without dying with too much.
Start the conversation early
Talking about money with your parents can be tricky. Older generations may be less inclined to have frank discussions about financial matters, and it’s easy to make your parents feel like the child in the conversation.
So, while there is no specific age you should begin these conversations, it’s important to start early. There are lots of benefits to your parents planning sooner rather than later, from making decisions about later-life care to helping reduce their tax liability.
The earlier you get a grip on your parents’ finances, the better you can ensure their future needs and wishes are met. It also helps you to protect them against financial fraud and other money-related missteps.
It can make sense to use life events, such as impending retirement, to kick off a conversation. Ask whether their pensions are going to provide the money they need to live the life they want. Find out how their investments are performing. Ask if they’ve paid off their mortgage.
One of the main issues to address is how your parents plan to fund their care as they get older. The last thing you want is for the financial burden to fall on you and other family members. So, if you have siblings, make sure that they are also involved in these conversations and that any future care responsibilities are arranged fairly.
Involve an expert
If your parents are not keen to open up about their finances, or are reluctant to engage in an intergenerational approach, it can be beneficial to seek the help of an independent third-party.
As a financial planner, I have found that getting involved in these discussions can diffuse some of the tension and can help parents engage with the idea of wealth transfer. Crucially, it also means that they are receiving independent, unbiased recommendations. It removes any notion of self-interest and is often better than asking a parent to trust a suggestion you have made.
Financial planners also have expertise in this area. They can advise on the best way to draw retirement income, how to fund later-life care, and make estate planning recommendations that meet your parents’ wishes while still minimising any tax liability.
The importance of planning
Beginning a conversation with your parents about their finances is an important start. Then it’s time to sit down and to put a formal plan in place.
When I work with clients from different generations, the first thing I need to do is fully understand their various financial positions and aspirations. Only then can I put together a plan to work out how their wealth will be employed or gifted throughout the wider family in the course of their lifetime and beyond.
There are lots of ways to look at this, including:
- Gifting – using the ‘seven-year’ rule and annual gifting exemptions to reduce a potential Inheritance Tax liability
- Ways of drawing income – pensions can be a very efficient way of passing wealth through generations and so, for example, it may be better for your parents to take income from other sources and use their pensions last
- Trusts – with a wide choice of trusts available it’s possible for your parents to leave a legacy to you or your children.
Using cashflow modelling can also be beneficial here. It’s possible to model how long a client’s wealth is projected to last over their lifetime, incorporating scenarios such as making gifts.
I’ve worked with many clients and showed them in black and white that they can afford to make a gift to children or grandchildren without worrying about running out of money. I can also model the costs of later-life care and other factors to give older clients the confidence to make financial decisions.
The planning out of future gifting, and who parents want to help in the years ahead, is particularly relevant with dementia on the rise. According to the Alzheimer’s Society, there are currently around 850,000 people with dementia in the UK and this is projected to rise to 1.6 million by 2040. 209,600 will develop dementia this year, equivalent to one every three minutes.
Making long-term plans now – even if your parents are relatively young – is crucial, as they could lose the mental capacity to make decisions at any time.
Don’t just consider the wealth
Including your parents in financial planning conversations isn’t just about redistributing wealth. It’s also about how that wealth will be managed when they are not able to do it anymore.
I am a strong advocate of clients using both the Financial and Health and Welfare Lasting Powers of Attorney (LPA). Putting an LPA in place ensures that the clients can appoint trusted individuals to manage their affairs for them when they either lose capacity or, in the case of a Financial LPA, when they no longer want to.
It’s also vital that clients have an up-to-date will, as this ensures that a client’s wishes are fulfilled when they pass away.
Start the intergenerational process now
Living longer is an opportunity to be seized and celebrated rather than a burden to be borne.
However, increased life expectancy can present challenges. You need to make sure that there is a robust financial plan in place which allows wealth to be passed between generations in a way that matches everyone’s needs, while ensuring provision is made for the older generation to enjoy their chosen lifestyle as long as they live.
If you want to have a chat about how I can help you put a financial plan in place that satisfies all the generations in your family, please give me a call on 07769 156 250.
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