As young people face daunting costs for everything from housing to education, it may be time for the older generation to share more of their wealth.
Life has become increasingly expensive for young people and for many the pressure of high property prices, expensive university education and the need to save for their own retirement is overwhelming. While the older generation, who benefited from rising house prices and final salary pensions, have arguably ‘never had it so good’, their children and grandchildren are struggling.
Many graduates leave university with debts of more than £50,000 and buying a home now costs on average almost £227,000 (£484,584 in London), according to the government’s UK House Price Index. And with the state retreating from pension provision, the commonly-used multiply-by-25 rule suggests they’ll need to save £1 million in their pension pots if they want a £40,000 annual retirement income in the future.
Little wonder, perhaps, that many are relying on receiving an inheritance. A recent Sanlam survey of 1,000 people aged between 25 and 45 found that almost two-thirds were anticipating an inheritance and 34% were relying on it to help them out in later life. In fact, many had given up saving in the face of huge costs and were ‘living in the now’, assuming that an inheritance would bail them out in the future.
So, is it time for parents and grandparents to step in? After all, our survey found that, in reality, many of these young people were over-optimistic about the amount they would receive. In addition, recent research by the Resolution Foundation found that millennials (those born between 1980 and 2000) would be, on average, 61 before they received an inheritance – long after the time they may want to, for example, buy a property.
To many it seems only fair that older people should share their wealth, given the different opportunities they have had. According to the Resolution Foundation, millennials are also spending almost a quarter of their income on housing, compared with the 8% that the ‘silent generation’ (born in the late-1920s to mid-1940s) spent at the same age. As recently as 2001, 25-34-year-olds were consuming the same as 55-64-year-olds, but now they are consuming 15% less.
What’s more, the challenge for these younger people is likely to increase because they will need to help pay for care for the older generation. Because people are living longer, spending on health and social care in the UK is set to rise by £24 billion by 2030 and £63 billion by 2040, and those people who are young now are likely to find themselves footing the bill.
How to help
Another survey for Sanlam found that the over-55s are indeed concerned about their children’s financial security, lending credence to the idea that personal finance is no longer something to be dealt with by individuals. Instead, families are beginning to discuss and manage money together and share wealth across the generations.
But, however much they may want to help out, sharing money while you are still alive can present challenges. What would happen, for example, if you gave away your money and then found yourself facing big expenses, perhaps for long-term care? And how can you actually hand over money without incurring a large tax bill?
The problems aren’t made any easier by the fact that too many families aren’t talking to each other about them. Our survey found that four out of 10 under-45s who expected to receive a sizeable inheritance hadn’t spoken about it to the person giving the money. Sanlam wealth planner Carl Drummond says: “A lot of people don’t like talking about this sort of thing. The young, especially, often don’t want to think about their parents dying, but it’s good for everyone to know where they stand.”
He adds: “Most people will need to take professional advice before embarking on complex intergenerational planning. But the first thing to do is to establish exactly how much you have. Write down the total value of your assets, where they are held and how they are invested. It might be worth consolidating accounts to minimise paperwork and administration. Once that’s done, you should work out how much money you’re likely to need in the future, whether that’s for everyday living, for holidays in retirement or, possibly for care in old age.”
These calculations will help you understand how much you have and how you might be able to help the younger members of your family, explains Drummond. An adviser can then help you consider how you can pass money to them while reducing your inheritance tax (IHT) liability. For example, you can give £3,000 a year and no IHT will be due on the money, and there are various other ways you can give gifts that won’t attract the tax.
The generation game
It’s also important to consider who you will be giving money to. Are you happy to give them a gift without any conditions, or do you want to retain a say in how the assets are spent or used?
Drummond says: “I had clients in their mid-70s with three sons. Two were doing quite well financially working as professionals in the City, while the third was a graphic designer and was unlikely to earn the same sort of money. His mortgage affordability was limited so they provided the full deposit, allowing him to purchase a property rather than wait until he could save the required funds over many years or wait until their death. They passed money on to him first because they thought he would benefit from getting onto the housing market.”
It is a simple example of how sharing money across the generations can overcome some of the financial challenges facing today’s young people. But the first step is to get professional financial advice to make sure that you don’t inadvertently end up giving away more than you can afford or paying more tax than you need to.
To find out how you could help your children financially, talk to your financial adviser.
At a glance
Two surveys were carried out for Sanlam by Atomik Research in April 2018 to find out more about people’s views of inheritance and intergenerational finance. For the first, they spoke to 1,000 people aged between 25 and 45, who were expecting to receive an inheritance of at least £50,000. In the second, the researchers contacted 500 over-55s with investable assets of more than £100,000 who were planning to leave an inheritance to children or grandchildren. The key findings included the following:
34% of under 45s are counting on the windfall of an expected inheritance to help them out in later life.
31% of those aged 25-45 say the inheritance they expect has put them off saving and they are ‘living in the now’.
More than four in 10 people aged between 25 and 45 in our research have less than £10,000 in their pension pot.
8% of under 45s have no savings or investments.
34% of under 45s don’t think they’ll be able to meet their pension pot goals.
One in three under-45s are relying on an inheritance to get them onto the property ladder.