Adrian Boulding: The multiple benefits of ‘lifetime giving’

New gift proposals by the Intergenerational Commission offer a great route for advisers to engage the next generation, believes Adrian Boulding

© Ian Macaulay

A new generational contract: A final report of the Intergenerational Commission, which was published last month, paints a bleak picture of the growing financial fault lines emerging between the generations.

The contrast between the housing, work and pensions situations and prospects of the millennial generation aged 14 to 36 today (according to Howard & Strauss’ definition of this generation born between 1982 and 2004), and the baby boomer generation now aged between 55 and 72-years-old, is particularly stark.

Starting with housing, the commission’s report finds millennials are only half as likely to own their own home by the age of 30 as their baby boomer parents were. The Institute of Fiscal Studies (IFS) confirms just 40% of the older millennial cohort born in the 1980s became homeowners by the time they reached their early 30s, whereas 55% of the previous generation born between 1965 and 1980 (generation X) were home-owners by that age.

The new report confirms 40% of millennials are now renting from private landlords right through their 30s – that is twice as many as generation Xers at the same age and four times more than baby boomers, who could also rely on a much larger pool of social housing than now exists. That in itself would not be such a huge issue if the cost of housing – and most specifically renting (as a percentage of total household income) – had not risen so steeply during the same period.

In its report The economic circumstances of different generations: the latest picture, the IFS found older millennials born in the 1980s who are renting are now spending 30% of their net income on housing costs, compared with 15% for homeowners.

Whereas people born in the 1960s, when they were at the same age some 20 years ago, would have been paying 20% of their overall income on housing costs regardless of whether they were renting or owned the roof over their head.

The Intergenerational Commission’s report finds that, since the 1930s, housing costs have, on average, tripled as a percentage of household income from 8% to 24%, and that is at a time when many more households began to consist of more than one breadwinner.

The evidence suggests long-term renting is more expensive that owning, but the shortage of housing stock has pushed prices beyond the reach of many. It is not so much a case of market failure – the usual rallying cry of politicians – but of market entrapment as high rents make saving for a deposit difficult.

Moving to income, the new report finds millennials’ relative earning power has slipped as has the security of their employment, as compared to Generation X immediately before them. Although employment levels are at an all-time high, pay has not even returned to levels seen at the start of the great recession more than 10 years ago. And because of the uncertainty in the job market, millennials tend to move jobs a great deal less – they are 25% less likely to move jobs voluntarily.

Pension shift

Finally, in pensions we have seen the demise of defined benefit (DB) schemes in the last 50 years. Far fewer have access to DB pension schemes today – just 10% of people in their 30s working in the private sector today are active members of DB schemes, compared with 40% of those born in the 1960s, according to the IFS.

Auto-enrolment (AE) has brought nearly 10 million people into an employer pension scheme for the first time yet current provision is something like a sixth of DB equivalent contributions. It offers woeful retirement prospects for millennials unless they find a way of saving considerably more than default contribution levels currently being demanded of them and their employers.

Worse, many millennials are treated as self-employed within the gig economy, which currently denies them access to an AE pension, statutory sick pay, paid holiday entitlements and other benefits baby boomers virtually saw as their birthright.

All the while, both baby boomers and the ‘silent generation’ (born between the world wars) are living much longer and consequently tend to have more complex and expensive healthcare requirements. The national health, social care and social security budget will need to rise by £24bn by 2030 as we cope with the pressures of an ageing population, the Intergenerational Commission report finds. Right now, these additional costs look likely to fall most heavily on the millennial generation, who seem least able to shoulder the additional burden.

The report proposes many remedies for this intractable, and currently worsening, intergenerational financial imbalance. The one that has grabbed all the headlines is the proposed ‘Citizen’s Inheritance’, which promises a £10,000 windfall to 25-year-olds to help them pay for additional education, retraining, launching a new business, topping up pensions savings or buying a first home – though, of course, that will just push house prices up even further …

The much more interesting proposal from a financial planning perspective, however, is the proposed reform of passing on monies to the next generation – ‘inheritance reform’, if you will. The report challenges the efficacy of inheritance tax, which looks punitive at 40% of entire estates above the tax-free threshold.

That blow has been softened by progressively increasing the tax-free threshold to £325,000 and allowing a further tax-free amount that will rise to £175,000 by 2020 if a home is being given to children or grandchildren. The much-hated inheritance tax generates roughly £5bn per year.

Thankfully inheritance gifts are an area that is seeing genuine increases. The commission proposes “harnessing some of this greater flow of private intergenerational wealth transfers to deliver a modest asset inheritance for all young adults” at a time when generations most need access to this money when they are trying to get on the housing ladder or build a family in their 30s and 40s. It seeks to encourage more giving well in advance of death.

The new ‘lifetime receipts tax allowance’ proposed in the report, offers £125,000 tax-free (rising with inflation) and then taxes gifts larger than this at a much lower rate of 20% up to £500,000 and 30% for more than £500,000.

What is more, switching the incidence of tax to recipients rather than givers, could encourage earlier intergenerational wealth transfers. In this way, the next generation get to be asset holders and calculated risk-takers and, by so doing, wealth creation is stimulated in future generations. This new tax system would still deliver £5bn to the Treasury in Year 1 but would grow with rising inheritance amounts.

‘Family wealth adviser’

From the point of view of wealth management firms and advisers, the institution of managing tax efficient lifetime intergenerational giving and asset management, both in advance of transfer and post-transfer, creates a terrific opportunity for two generations to get back in the same room with a ‘family wealth adviser’ to discuss how this wealth transfer would best work for both parties.

In this way, it also helps advice firms to bridge to the next generation’s customers and ensure the firm’s value does not die along with its ageing customer base.

What needs to happen is that two or even three generations must be encouraged to plan for a progressive handover of assets as their own financial needs drop away. It is now historically proven that retirees spend progressively less as they get older, until perhaps very old age when more intensive medical care may be needed. A full lifetime financial projection can often reveal that baby boomers have already accumulated far more wealth than they will ever consume by themselves.

Our wealthier forebears had a solution for this, called a dower house. The first son, upon his marriage, would be given the keys to the large family house and his (perhaps widowed) mother moved into a small dower house on the estate. Now, I am not suggesting modern families should put granny in the garden shed but, as a society, we need to encourage our elderly empty-nesters to release their under-occupied houses so they can be family homes again.

The commission’s encouragement of lifetime giving could bring multiple benefits. It offers a better deal for currently hard-pressed next generations; and a better deal for the silent generation and baby boomers seeking to avoid the seemingly punitive inheritance tax hit.

Meanwhile, longer term, it promises more money for the Treasury, while offering financial advisers and wealth managers a smoother route to finding the next generation of people to advise.

Adrian Boulding is director of retirement strategy at Dunstan Thomas