Share the wealth: Setting up your younger family members for success

In these strained pandemic times, the financial generosity of parents and grandparents across the UK is a huge lifeline for many cash-strapped young people, as the cost of housing and university, plus the uncertainty of the job market, weigh heavier than ever before.

At Wellesley, we have lots of useful information for those of you who wish to financially support your children or grandchildren – as always, the first step is to have a secure plan in place, to ensure that nobody loses out.

If you worry about what lies ahead for the younger members of your family, you’re not alone. It’s completely understandable, given the current state of affairs across the globe amidst the COVID-19 pandemic, with ‘normality’ still feeling like it’s some way off.

The Institute of Fiscal Studies discovered in its recent analyses that the first lockdown of 2020 widened the learning gap between richer and poorer primary school children.1 Neuroscientists have advised that decreased face-to-face contact among teenagers could have detrimental long-term effects on their brain development, behaviour and mental health.

Furthermore, the stark reality is that, beyond education, the economic consequences of coronavirus are suffered most greatly by younger generations, with unemployment figures among 16- to 24-year-olds increasing to 13.4% – more than three times the figure for the UK as a whole.2

A lifeline for loved ones

The coronavirus undeniably continues to affect all of us in many ways, changing life as we once knew it. Many older people, who are in the high-risk category due to their health, are also having their financial resilience tested – such as facing retirement insecurity, for example.

However, not everyone in this older age group will have felt such a great impact – some will have been fortunate enough to enter the recession with a considerable financial buffer in place. This will mean that they’re now in a position to provide monetary support, and so they might be considering giving younger members of the family a meaningful helping hand.

“Older people will have their own worries, but they may not be financial,” says Melloney Underhill, Marketing Insights Manager at St. James’s Place Wealth Management. “Their income might have dropped, but in most cases not as much as their spending. So, they could be well-placed to offer financial support to future generations, while easing parents’ pressures.”

Underhill believes that this is something that parents and grandparents often take great pleasure in. “They like to see the value of their money in action.” They also understand that helping out younger family members – whether that be with the purchase of a first car or a first home – can make a noticeable difference to their lives, especially during these current uncertain times.

Invest early

On the other hand, there are many advantages to be had in setting up savings plans for a child early on too, Underhill adds.

“Whether it’s investing in a Junior ISA or child’s pension, it’ll give them a financial head start when they reach adulthood, and better prepare them to cope with challenges like these in the years to come – more so than giving them ad hoc spending money or bailing them out in an emergency.”

She recalls the old proverb: Give a man a fish and he eats for a day, but give him a rod and he eats for a lifetime.

Tony Clark, Senior Propositions Manager at St. James’s Place, agrees:

“With few children and teenagers learning personal finance at school, getting them used to how money works now can only be a good thing. Otherwise, when they start saving into a workplace pension, will they really engage with it – or appreciate its value? A child’s pension helps bridge that gap.”

Gifting goals

Clark highlights the fact that it’s wise to first map out your financial goals instead of worrying about what type of account to open or what financial gesture to make.

“Is it to help cover university fees, give a grandchild a leg up on the property ladder, or a head start when it comes to retirement planning?” he asks.

It’s also crucial to consider what level of control you’ll be required to have and, in the case of setting aside money for a grandchild’s future, decide when they’ll get it. Clark comments that there’s a reasonable chance that house deposits and retirement planning are not going to be at the front of a young person’s mind on their 18th birthday.

Inheritance Tax (IHT) could become an issue for cash gifts too. “Giving money away can be a great way to use IHT gifting allowances,” explains Clark. But, he warns, gifts that exceed allowances will only become IHT-free after seven years, so life expectancy will also need to be considered.

Priceless advice

There are so many factors to think about, and so Clark advises families to organise a chat with a financial adviser to make sure their money’s working in the right way.

“Something that sounds simple and easy, often isn’t. They may not have considered the tax implications of a particular course of action, for example – or opted for something that doesn’t afford the degree of control they’d like.”

Likewise, prospective benefactors will undoubtedly want to discuss their plans with their children, Clark suggests. Looping an adviser into key conversations could well prove helpful, especially where there might be conflicting objectives or complex family dynamics at play.

“There could be different views on how money is spent,” he explains, “and as a facilitator, an adviser can take the emotions out of the decision making.” It may be that they can also find room for money to be split across several different objectives, he adds.

The most valuable benefit of professional advice is that your adviser will be best placed to look at the bigger picture, devising a plan that both meets your objectives and considers the impact it could have – not just on your family’s financial well-being, but your own, too. As Underhill rightly remarks: “It’s important to feel safe in your decisions and reassess what it means for your own goals.”

Are you planning on providing some form of long-term financial support for your children or grandchildren, making it a financial win for everyone concerned? The team here at Wellesley are happy to provide you with all the advice you need, especially in these difficult times, so don’t hesitate to contact us today on 01444 244551.

Sources:

 1 Study of more than 4,000 families, carried out for the Institute for Fiscal Studies (IFS), published in May 2020
2 Office for National Statistics, Labour Market Economic Analysis, September 2020

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time.

The value of any tax relief generally depends on individual circumstances.