LET’S TALK ABOUT INTERGENERATIONAL FINANCES
The Financial Conduct Authority (FCA) has announced its desire to start a conversation about intergenerational differences and the changing financial needs facing consumers from different age groups. While it’s certainly good to talk, this is obviously an extremely complex issue and the financial narrative is not one that everybody may want to hear.
Changing distribution of wealth
The way people build and use their wealth has clearly evolved significantly over the past fifty years or so and this has had a major impact on financial circumstances across the generations. As an example of these changes, the FCA1 released statistics showing how wealth levels for people of the same age changed between 2006/08 and 2014/16.
The data showed that, for the average 40- to 50-year-old, their total wealth was less than that compared to individuals of the same age 10 years earlier. In contrast, the average individual aged 60 to 70 was found to have significantly more in real terms.
Different groups face different challenges
However, the financial challenges facing different generational groups have clearly evolved too. For instance, increasing life expectancy means older people are living longer, resulting in the Baby Boom generation requiring new financial strategies to maintain living standards in later life.
Younger people, on the other hand, face obstacles building wealth. These include high levels of student debt, soaring house prices and a jobs market with less secure terms of employment. As a result, millennials often find it difficult, or impossible, to take their first step onto the housing ladder.
It’s no bed of roses being squeezed in the middle either. Generation X are typically financially stretched, balancing the responsibility of helping older generations in later life with a growing need to support the younger generation. Setting money aside for their own financial needs, such as retirement provision, can therefore be extremely difficult.
Sound financial advice remains key
The intergenerational fairness debate clearly covers a range of difficult issues and potential solutions are unlikely to be universally popular. However, the debate reinforces the necessity for individuals of all ages to seek sound financial advice.
1FCA, May 2019
|THE WAY PEOPLE BUILD AND USE THEIR WEALTH HAS CLEARLY EVOLVED SIGNIFICANTLY OVER THE PAST FIFTY YEARS OR SO AND THIS HAS HAD A MAJOR IMPACT ON FINANCIAL CIRCUMSTANCES ACROSS THE GENERATIONS
RETIREMENT: TWO THIRDS RISK MAKING THE WRONG CHOICES BY GOING IT ALONE
Pension reforms introduced in 2015 mean there is much greater freedom, both for investors and for those wanting to access their pension pots. Despite having to make many important decisions, both in the years running up to retirement and afterwards, a recent survey2 shows that only 32% of retirees take professional advice.
The figures reveal that many are not fully exploring their options and may not be opting for the most suitable pension arrangements to fit their individual circumstances. The study also shows that two-thirds did not shop around before buying an annuity or selecting drawdown from their pension provider, unaware that they could shop around for a better deal.
The Financial Conduct Authority has expressed concerns that the lack of advice could result in poor investment decisions, or people withdrawing cash from their pension pot and putting it into low return cash funds, where it will be eroded by inflation.
2Canada Life, March 2019
TRUST IN TRUSTS
The last decade has witnessed a number of legal reforms aimed at cracking down on the use of trusts as a potential means of tax avoidance. However, despite these changes, trusts can still provide an effective way to transfer wealth and thereby help families achieve their financial goals.
What is a trust?
A trust is a legal arrangement which allows assets, usually property, investments or money, to be managed by a trustee for the good of one or more beneficiaries. These beneficiaries can be named individuals, such as your children, and people who are yet to be born.
There are many different types of trusts with the main ones being: bare trusts, interest in possession trusts, discretionary trusts, accumulation trusts, mixed trusts, settlor-interested trusts and non-resident trusts. The type of trust that is right for you will depend upon your objectives and personal circumstances.
Advantages of establishing a trust
Trusts can be set up for a variety of purposes with one of the main reasons as a tax planning tool in order to mitigate a potential Inheritance Tax liability. They are also commonly used to set aside money or assets for dependants who are either young or mentally incapacitated, and also to protect family assets particularly so they cannot be sold to pay for residential care fees.
In order to set up a trust, you will need to appoint trustees to look after the assets in the trust on behalf of the beneficiaries. A key aspect when creating or maintaining a trust will be ensuring ongoing compliance with current tax law. This will inevitably require professional advice in order to ensure the trust meets all of its tax obligations.