We live in a world of great uncertainty in terms of the global economy and what the future holds for our children and our children’s children.
Average life expectancy is increasing with the aid of medical science, with the latest figures from the Office of National Statistics suggesting that one in every three babies born this year will live until they are 100.
As a firm of Chartered Financial Planners we have seen, over the last few years, an increase in children being financially dependent on their parents for longer than in previous generations, as well as being reliant on their parents’ support to get onto the property ladder.
It could be suggested that the retiring/ recently retired baby boomer generation have ”never had it so good” by being the last generation to retire on Defined Benefit pensions, with a full service NHS (until now), free education costs and having lived through the longest period of property appreciation and investment growth in the UK.
If this is the case, many of this generation that have undertaken prudent financial planning will have more assets than they need to live comfortably on for their retirement and therefore, need to give careful consideration to the best way to “gift” to the next generation.
Equally, we also come across an increasing trend of grandparents “gifting” too much too soon and not making adequate provisions for their own future.
Once money is gifted it often cannot be recalled and the retired generation need to consider their own longevity. For example, the likelihood of requiring increasing levels of care in the future is high, while at the same time a sound financial buffer is required to remain fully in control over the quality of such care. The need for proper consideration and planning for these eventualities has never been more important.
This also raises the question of how young people can be encouraged to “save for a pension” to lighten the potential financial burden they may face in later years. Whether ensuring a good start to adult life or making provision for the longer term, funds should be sheltered within a favourable tax environment.
There are a number of options, for example, parents (or any adult) can invest up to £2,880 into a stakeholder pension pot for a child every year. The Government will top up your contribution to make it £3,600, ie, an additional £720. So by the age of 18 if such payments were maintained from birth, the child would start adult life with a pension pot worth circa £86,000 (at an overall growth rate of 4 per centand with assumed charges of 1 per centdeducted) for a total outlay of £51,840.
Clearly this is a real bonus and head start given that most people currently do not start saving for their future until their 30s. Even if they do not make another contribution, this pot could then grow to £380,000 by age 68 (assumptions as before). It is of course important to note that all of these projected values shown do not take into account the impact of inflation over time.
The pension fund is very tax-efficient so even a one-off payment of £2,880 could deliver £27,000 or so by the new retirement age 68 (assumptions as before), or more if this age increases again. For example, with the right level of planning it can be estimated how much would be needed to generate a £1 million pension pot by age 68, if pension contributions were paid from birth.
It should be noted that pension funds cannot be accessed until age 55 at the earliest (under current legislation) so this is a way of making provision for the long-term, as well as ensuring the younger generation do not spend this during the shorter term!
High quality and impartial fee-only financial planning advice has never been more important to quantify what assets one can realistically afford to pass to the next generation, whilet not compromising the financial security of the parents or grandparents. It is also then essential that any financial plan is reviewed regularly to take account of any changes in circumstances.
This article is based on our understanding of current legislation. It is solely for information purposes and is not intended to constitute advice or a recommendation. The way in which tax relief is applied depends on individual circumstances and may be subject to change. It is also important to remember that the value of investments can fall as well as rise and you may not get back the amount originally invested.