It’s likely that one of the key goals in your financial plan is to ensure that you can provide your family with financial security. So, intergenerational wealth planning may be a key concern for you, especially as you get older.
Often, intergenerational strategies focus on estate planning and how to reduce the tax your beneficiaries pay on your estate at the end of your life.
But, while this is important, it is only part of the story. You may also need to consider how you build and retain wealth at every stage of life, so you can leave more behind for your family.
Additionally, there are ways to pass a portion of your estate to loved ones while you are still alive. In some cases, this may benefit them more as they could use the money to build retirement savings or achieve goals like getting on the property ladder.
A 2022 study from Aviva found that this approach is becoming more common as more than half of over-55s wanted to see the benefit of giving financial help to family members while they are still alive.
If you take a holistic approach and create an intergenerational wealth strategy that considers ways to support your family at every stage of life, you may be able to maximise the support you give them.
Read on to learn some of the main things you may need to consider at each stage of your financial plan.
1. Accumulation
During the accumulation phase, you may not necessarily think about what you will leave to your family.
Yet, if you find ways to make your wealth more tax-efficient now, you may be able to retain more of it. Ultimately, that means you can leave more to your family, while still achieving all your other financial goals.
There are several ways you can potentially do this:
- Maximise pension contributions – When you contribute to your pension, you receive tax relief at your marginal rate. In effect, this means that a £100 pension contribution only “costs” £80 if you are a basic-rate taxpayer because you receive 20% tax relief. You can also claim additional tax relief if you are in a higher tax bracket. This can be an effective way to reduce your Income Tax bill, and your pension normally falls outside of your estate for Inheritance Tax (IHT) purposes too.
- Make full use of your ISA allowance – You can pay up to £20,000 into an ISA (2023/24 tax year) and you will not pay any Income Tax or Capital Gains Tax (CGT) on the returns. So, you can potentially reduce the tax you pay by making use of the entire allowance, where possible. However, it’s important to mention that ISAs do form part of your estate for IHT calculation purposes.
- Find ways to reduce Capital Gains Tax (CGT) – Using tax-efficient wrappers like an ISA is one way to reduce CGT and there are others. For example, you can consider timing the sale of assets to ensure you do not exceed your annual exempt amount – £6,000 in 2023/2024. You could also transfer assets to your spouse to make use of both annual exempt amounts.
As well as working to retain as much of your wealth as possible, you may also consider how to help your children and grandchildren build their own savings by transferring wealth to them now.
For instance, you can pay up to £9,000 into a Junior ISA for them (2023/24 tax year) and all returns will be free of Income Tax and CGT. They can take control of the account themselves when they turn 16 and withdraw the funds at 18.
Transferring wealth in this way during the accumulation stage may help your loved ones work towards more immediate financial goals, such as paying for university or buying their first home.
Alternatively, you could make pension contributions on behalf of a family member, and they will receive tax relief at their marginal rate of tax.
They may also see significant growth from their pension over the years, so they could benefit more from pension contributions than they would from inheriting the money when you pass away.
That said, you are subject to gifting rules so you may want to seek advice before making any gifts, to avoid surprise tax charges.
2. Decumulation
The decumulation stage is the process of liquidating your assets to generate an income to fund your retirement.
It is important to carefully consider how you do this, so you can draw as much income as possible and make your wealth tax-efficient.
Unfortunately, as reported by Professional Adviser, fewer retirees are taking regulated advice during the decumulation stage.
Consequently, they may fail to plan properly, potentially causing unintended tax consequences, which can disrupt intergenerational wealth transfer later in life because they lose more of their estate to tax.
Fortunately, there are ways to make your wealth more tax-efficient during the decumulation stage, so you can retain more of your estate to pass on to loved ones:
- Use all your tax allowances – Making full use of your Personal Allowance for Income Tax, Dividend Allowance, CGT annual exempt amount and Personal Savings Allowance (PSA) means you minimise tax on the funds you draw from your retirement savings, so you can retain more of your wealth.
- Take tax-free cash to supplement income you draw from your pension – This may help you avoid moving into a higher tax bracket as you do not need to draw as much taxable income to fund your lifestyle.
- Retain tax-efficient funds for as long as possible – Your pension does not normally form part of your estate for IHT purposes, so you may want to retain these funds for as long as possible. Instead, you could consider drawing your income from other savings that are liable for IHT first. This means you may be able to reduce the IHT that your family eventually pay.
You may also need to consider short-term market volatility when drawing income from pensions and investments as it could affect how quickly you spend your retirement savings.
This is because, when share prices are low, you may have to sell more units to generate a consistent income to fund your chosen lifestyle. As a result, your retirement savings may deplete faster, and you could have less to leave to your family.
3. Preservation and transfer
Hopefully, if you consider intergenerational wealth planning at every stage of life, you can retain more of your own assets and help your loved ones begin building wealth too.
Towards the end of your life, your priority is likely to be preserving your wealth and transferring a portion of it to your beneficiaries.
Finding ways to reduce the IHT that your family pays is important here and there are several ways to do this.
- Lifetime gifting – Any gifts up to a total value of £3,000 automatically fall outside of your estate for IHT purposes (2023/24 tax year). You can also carry over any unused allowance from the previous year. Further gifts may also fall outside of your estate, provided you survive for seven years after giving the gift. Alternatively, you may be able to make regular “gifts from income” to reduce the size of your estate.
- Make investments that qualify for business relief – Investments made through certain schemes, including the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS), qualify for Business Relief. This means they are not considered part of your estate when calculating IHT.
- Using trusts – In some cases, assets in a trust are exempt from IHT. However, the rules surrounding trusts can be complex so it may be useful to seek advice here.
By taking a holistic approach to intergenerational wealth planning and incorporating it at every stage of your financial plan, you can ensure that both you and your family are in a position to achieve your long-term financial goals.
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Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.