Intergenerational financial planning: a short guide

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A robust financial plan is great for helping you achieve your long-term goals. Yet is this integrated with the financial plans of your children or other loved ones? An “intergenerational” financial plan goes beyond your immediate household and attempts to coordinate everyone’s circumstances and objectives. In the process, each person has the opportunity to grow, protect and transfer their wealth more efficiently.

Below, we offer a short guide to intergenerational financial planning – how it works and ideas to get started. If you want to discuss your strategy with us, please get in touch to arrange a meeting with a financial adviser:

01603 789966
[email protected]

What is intergenerational financial planning?

With a “normal” financial plan you try to optimise your own financial situation – e.g. pensions, investments and taxes – to progress optimally towards certain goals. This goes beyond mere budgeting, which attempts to stabilise your short-term finances, setting you on course towards building long-term wealth.

An intergenerational financial plan goes even further than the former by enabling grandparents, parents and children to work together so they can maximise their individual and family wealth. The classic example is a parent who wants to pass down their family business to a child without incurring huge tax bills for either party. However, many types of families can benefit from intergenerational financial planning.

What are the benefits?

In short, an intergenerational financial plan helps everyone grow wealth, achieve goals more optimally (e.g. faster) and shield each person’s finances from negative events. For instance, suppose you want to pass down an inheritance to your adult child after you die. What might happen to the money if your child gets divorced afterwards?

Without coordinated financial planning, some of the inheritance could end up with your child’s ex-spouse (which you and your child may feel would be unfair). To protect against this, a pre-nuptial agreement or consent order can help to formalise an understanding between the parties.

Another scenario might be that you lend money to your child during your lifetime, perhaps to help them onto the property ladder. In this case, would you expect to be repaid? If so, then a loan agreement can set out, in writing, what happens to the money if your child divorces.

There are also other, more positive scenarios where an intergenerational financial plan can be useful. A good example is pensions. Suppose you want your loved ones to inherit a meaningful lump sum after you die. You also want to enjoy a comfortable income in retirement. In 2023-24, an individual can pass down a pension “pot” (a defined contribution pension) to loved ones usually without inheritance tax (IHT). This makes pensions a very useful estate planning tool!

Also, a pension is very powerful for helping to build retirement wealth. A maximum of £60,000 can be contributed to an individual’s pensions (from all sources including employer) each tax year tax efficiently. Personal contributions up to 100% of earnings or £3,600 if more are eligible for tax relief. For instance, a higher rate taxpayer gets a 40% “boost” to contributions that are matched by income taxed at that rate.

Here, we can start to see the potential of pensions for intergenerational financial planning. They can help beneficiaries receive more wealth from an inheritance. In addition, during the owner’s lifetime, it can provide a tax-efficient “vehicle” for storing wealth and providing an income once minimum pension age is reached (currently 55 and rising to 57 in 2028).

How do we build an intergenerational financial plan?

A good first step is to open the idea to your loved ones and discuss your respective financial goals and circumstances. This might be easy or difficult depending on family dynamics, personalities and attitudes to money. Therefore, reflect carefully on how and when the subject could be approached. If the relevant parties share the same financial adviser, this can help discussions as you immediately have access to a professional who has a firm grasp on everyone’s needs and objectives.

An intergenerational financial plan will be easier to build if everyone understands one another and agrees on priorities. Assuming you can all reach this point, consider working with a professional to build a secure central database that everyone can refer to. This might include care plans, funeral instructions, wills, life insurance policies, power of attorney and other key documentation. This helps to prevent misunderstandings and “misremembering” later.

If you can all maintain open, healthy and constructive communication with each other, this can help to unearth opportunities which you may not have thought possible before. This helps to create an atmosphere of trust that each of you is trying to look out for everyone’s interests. It might help to invite your loved one(s) to a meeting with your financial adviser, who can provide an objective voice to the conversation and help diffuse historical emotional “baggage” which may have hindered progress in the past.

Invitation

If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a meeting with a financial adviser:

01603 789966
[email protected]