Historically, we are used to the idea of having one generation in active retirement at one time, with the next generation only retiring as the elder generation becomes less active, is in a care home, or dies.
This will have meant that one generation was actively earning income while the other would be living on funds they had built up, usually in the form of a fixed income. However, calculations based on ONS data and research predicts that 1.2 million families will contain more than one retired generation by 2039, rising from 624,000 families today, a 90% increase in 20 years.
Multiple generations of the same family will thus be relying on their built-up wealth, rather than ongoing earned income. As this dynamic changes, the way we think about funding for retirement and our spending habits will also need to change.
Furthermore, increasingly complex family structures also mean that retirement income will need to stretch across generations. Figures from St. James’s Place’s Study into intergenerational wealth and retirement planning show that one-quarter (24%) of future retirees are expecting to provide financial support in retirement to someone other than their current partner.
This may not just be grandchildren or children but also their ageing parents, a former partner or a partner’s children. The most common expectation is that this will be through everyday living expenses, which may be harder to plan for in the future.
When dealing with all these generations, planning the best way to fund for things such as long-term care or inheritance tax planning will only become more complex and needs to start early. Our research has found that that 79% of those who receive ongoing face-to-face advice believe they have enough funds to fulfil their retirement plans, compared to 35% who do not receive advice.
Families often find it hard to talk about money but involving a professional from an early stage should help break down these barriers, giving a better outcome for all involved.
Passing money down to future generations
Furthermore, our research also reveals people expect to pass on less money after they have gone. For those who have enough wealth, the amount they expect to pass on is likely to be significantly impacted, with future retirees expecting to pass on £50,606 less of their retirement pot on average compared with current retirees.
Added to this, even with multiple generations in retirement, the way in which funds are passed down the generations is also changing. In 2015 we saw the Government tear up all the rules with regards to pensions and pension death benefits. This had led individuals using other assets to fund their retirement and protecting their pensions for future generations.
The biggest driver for those utilising their other assets to fund their retirement are the beneficial tax treatment of beneficiaries’ drawdown. Not only are the funds inheritance tax free but if the member dies before age 75, the beneficiary can take income from the fund, tax free at any age.
Even if the member dies after the age of 75, the income is taxable at the beneficiary’s rate of income tax rather than that of the original member. This could be tax free if left to a child or a lower paid adult. The additional benefit is that the funds, if not used by the first beneficiary, can be passed on to their chosen person and so on.
These inherited funds are not tested against the beneficiary’s lifetime allowance so there is no limit on the amount of tax privileged inherited funds one person can have. All this in addition to their own pension fund, which would be subject to the lifetime allowance.
This could mean that in years to come advisers will have to deal with clients that have multi tranches of pensions, that may have come from different inheritances, that could be taxed differently depending on the age of the person they inherited them from. This will mean an even more complex decision of where to draw income from, both before and after retirement.
It will also add to the complex issue of who to leave the funds to on death in each case. This is where leaving the funds to a trust may still be an option for those with complex family structures.
By using beneficiary’s drawdown, the original scheme member will have no say what happens to their funds after their death, the beneficiary they leave it to could spend it all or leave it to anyone of their choosing. Using a trust would allow the original member to choose trustees they believe will follow their wishes.
Issues around inheritance wealth and retirement planning are complicated and can be daunting, especially given increasingly complicated family structures.
With people living longer, the make-up of today’s modern family changing, and retirement provision more and more the responsibility of the individual, the way we need to think about planning for the future has fundamentally shifted.
The next generation of retirees can’t expect to follow the same path as those currently in retirement. Therefore, it’s important to take advice and put in place the right plans at an early stage to allow greater opportunity to build wealth over time and alleviate some of the stress.
Claire Trott is head of pensions strategy at St James’s Place Group