The next 30 years will see “the greatest wealth transfer in UK history” according to FTAdviser, presenting challenges for those giving and receiving an inheritance, either during life or on death.
The report describes a generation of retirees who understand that their children might not have the safe opportunities that they had.
Jobs are no longer for life, the “gold standard” final salary pension is largely a thing of the past, and millennials (those between 25 and 40 in 2021) will be the first generation in over 100 years to be financially worse off than their parents.
As millennials struggle with university fees, childcare, and increasingly unaffordable housing, the Bank of Mum and Dad is opening as retirees look to help the next generation.
Here are some important things to consider if you are giving or receiving intergenerational wealth.
1. Do your children understand the basics of budgeting?
If you are gifting your hard-earned wealth to the next generation, you’ll want to be satisfied that they have the financial acumen to manage those funds in the best possible way.
The Scout Association recently unveiled their first new badge in three years – a Money Skills activity badge aimed at children between 6 and 10 years old. It will educate children to make sound financial decisions and develop good financial habits.
While those receiving your gift or living inheritance might be older than cub and beaver age, the need remains to instil good financial habits when children are young.
Teach the next generation the importance of paying their future selves first by using the 50/30/20 rule.
The first step to better budgeting is understanding cash flow through logging incomings and outgoings, then understanding the difference between wants and needs.
Your child and grandchild should consider spending 50% of their monthly income on needs (rent, food, energy bills), 30% on wants (holidays, new clothes, meals out), with the remaining 20% going into a pension or savings.
Doing so each month, on payday, means essentials will be covered straight away, which should make budgeting for the remaining 30% much easier.
2. Will your children be able to effectively manage an inheritance?
Even armed with all the budgeting tips you have provided, your children might still need help to manage their money and find the best way out of accumulated debt.
Those under 25 have suffered huge job losses since the outbreak of the pandemic, with sectors tending to employ younger people – such as entertainment and hospitality – forced to close. In the 12 months to May 2021, the number of under-25s on company payrolls fell by 289,000.
If you are opening the Bank of Mum and Dad to help a child who has suffered financially during the pandemic, you’ll want to be sure the money is going to the right place.
Be sure your child understands the need to pay off high-interest debt first. Personal loans and credit cards can carry huge interest, which can make paying them off seem like an uphill struggle. In the long run, though, removing this debt first makes the most financial sense. It will leave your child with more disposable income to pay off lower interest debt, like an overdraft, later.
Overdrafts and credit cards can seem like “free money” so teaching financial lessons and helping them to form good financial habits early in life is crucial.
3. Ask yourself the right questions before opening the Bank of Mum and Dad
You’ll need to be sure you are making the best choices too. If the time has come to transfer some of your wealth – whether as a gift or a loan – you’ll need to be sure you ask yourself the right questions.
Can I afford it?
While the natural inclination of any parent will be to help their child if they are struggling, you shouldn’t do so if it detrimentally impacts your own standard of living.
Not only will this put you in financial difficulty, but it could affect your child in the long term if an inheritance is depleted or used inefficiently.
Are the parameters of the gift or loan understood?
One of the simplest questions you can ask before passing money to the next generation is: “Is this a gift or a loan?”
Making this very important distinction at the outset can save embarrassment and awkwardness later on.
The difference is clear. If it is a loan, you are expecting the money back (even if your interest rates are low or non-existent) whereas you will give a gift without expectation of repayment.
Have I sought legal help?
Gifting money to help a child onto the property ladder can be particularly stressful and fraught with danger. It might seem heavy-handed to seek legal advice, but it is particularly necessary where your child is buying a property with a partner.
You’ll want to be clear about what happens to your loan if your child’s relationship breaks down. Will you get money back from the sale? Will you still part-own the property?
Get in touch
Passing on your wealth – whether during your lifetime or on death – is a great way to help ensure the financial stability of the next generation but there are important implications to consider too.
We can help, so get in touch. Email enquiries@hda-ifa.co.uk or call 01242 514563.
Please note
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.
