What is intergenerational wealth planning and why is it important?
Effective intergenerational wealth planning is a priority for many of us, as it ensures the entire family is on a firm financial footing by taking the needs of several different generations into account.
Intergenerational wealth planning is about more than just ensuring that you pass money down to your children in a tax efficient manner.
It can encompass everything from setting up your children with a pension or a house deposit to making provision for long term care and securing the future of the family business.
A financial planner who can consider the needs of the entire family will be able to help you to make the most of tax breaks, annual allowances and schemes such as trusts to ensure that the whole family benefits.
Intergenerational wealth management could save your family thousands of pounds in tax.
By making the most of annual allowances and rules around gifts you could structure your family’s wealth effectively for every generation.
You should be aware of pitfalls such as giving away too much too soon.
A financial adviser could help you to understand the options available to you so that the family can live well now and you can leave a legacy for the future.
What is intergenerational wealth planning?
Intergenerational planning is the process of structuring your finances to support not only yourself but also the generations below and above you, making your money work hard for the entire family.
Due to the rising cost of living, this type of planning is more important than ever.
Studies show that younger generations are finding it harder to buy a home, afford nursery for their children, and save into pensions.
A majority of Baby Boomers (73%), Gen X (87%), Millennials (93%), and Gen Z (79%) agree it is more difficult to buy a home now than it was for their parents.
Meanwhile, a growing number of families are being hit with IHT bills when a loved one dies.
In many cases, these bills could have been avoided by giving money away earlier or structuring finances differently through effective intergenerational planning.
How can you make the most of this planning for your family?
By starting early and using a combination of annual tax allowances and tax-efficient structures such as ISAs, pensions and trusts, you can pass money to family members tax free.
By making a will and thinking about protection policies such as life insurance and critical illness cover, you can gain peace of mind in knowing that your whole family would be protected if something unexpected happened.
Allowances and tax breaks to be aware of
Some of the most important allowances and tax breaks you can use in intergenerational estate planning include
The seven-year rule
Once you’ve given away money it does not count as part of your estate for IHT purposes as long as you survive for seven years after your gift.
From the third year after you’ve given the money away a taper applies so that the IHT rate on your gift is reduced.
The seven-year rule means it can be a good idea to give money to family sooner rather than later if you know you won’t need it yourself.
Your annual gifting allowances
Outside of the seven-year rule you can still give other money away tax free if it is within your gifting allowances.
These include £3000 of gifts to anyone every tax year plus extra gifts for family when getting married.
You can find out more about this on the government website.
IHT allowances
IHT is levied on your estate after you die, and can cut down the amount you leave to your relatives.
But although the tax rate is 40%, it is only paid on the amount of your estate that is worth over a certain threshold, and you can pass anything to a surviving spouse or civil partner without any tax being due.
You also get an extra allowance when you’re leaving your home to a direct descendant.
Other intergenerational wealth planning tools
As well as these allowances, there are other tools you can consider when thinking about how to help the whole family.
These include:
Trusts
There are many variations of trusts that allow you to give money away at different times and shelter it from the taxman.
A financial adviser or lawyer can help you find the right one for you.
Junior ISA and pensions
If you have children or grandchildren you want to pass money to you can do this in a tax efficient manner by contributing to Junior ISAs or pensions that grow tax free.
A Junior ISA belongs to the child from 18 and they have full control.
You can add £2,880 to a child’s pension every year and the government will top this up to £3,600 even though the child does not pay tax, but they will not be able to access the money until they are much older.
Insurance
Life insurance can be a good way to help your family after you’ve gone, especially if you want to ensure that they receive money quickly before the end of a lengthy probate process.
You’ll need to ensure your insurance policy is written in trust if you want it to be outside your estate for IHT purposes and more easily accessible.
A financial adviser can help with this.
Intergenerational wealth planning common pitfalls to avoid
Planning for the future across generations can be a great way to help all of the family.
However, there are some pitfalls that you need to consider when making provision for everyone.
Make sure you have enough for your own future before giving money away.
It can be hard to work out how much you’re going to need.
One good place to start is the Retirement Living Standards from the Pensions and Lifetime Savings Association (PLSA) which calculate the amount of money needed for different types of retirement.
A financial adviser will be able to help you with cashflow planning, a more precise way to work out how much money you need.
It’s also really important you speak with the whole family when planning your finances intergenerationally so that they understand your wishes and can express their own.
Dos and don’ts for intergenerational wealth planning
✅ Do
Start thinking early: a little bit tucked away in a pension or Junior ISA for a child can grow over time and is an easy way to start transferring wealth.
Take advantage of annual allowances, as many are ‘use it or lose it’ opportunities.
Make a will and update it regularly. Ensure your family knows where to find it.
Nominate beneficiaries for your pension and any work death benefits to make it easier for your family.
❌ Don't
Leave an admin muddle: ensure your family has a list of accounts and how to access them available when it is needed.
Deprive yourself of assets that you might need later. A financial adviser can help with cashflow planning so you know how much you can give away.
Breed resentment. Ensure you’ve spoken to all family members about your plans and been as fair and equitable as possible. You may want to involve a trusted adviser in these conversations to make them less awkward.
Get expert wealth planning advice
Intergenerational wealth planning can benefit everyone if it’s done right, but there are many allowances and rules that you might be unaware of that could affect your plans.
A qualified financial adviser will be able to help you to negotiate the pitfalls.
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