Talking about my generation
Stephen Ritchie discusses some of the financial issues facing younger generations today and how gifting may be used by older relatives to provide assistance.
It was the best of times, it was the worst of times. To me, this sage 19th century Dickensian observation perfectly encapsulates intergenerational differences in financial conditions that have become ever more polarised since the end of the last century. While our retirees have undeniably benefitted from asset price appreciation well ahead of inflation and a favourable pension climate, the converse is true for our Millennials i.e. those born from the early 1980’s onwards and of working age today. Indeed, the young face a number of well publicised difficulties in achieving financial security, causing an increasing dependence on older generations of their families.
Firstly, getting on the property ladder. The ‘average house price to average first time buyer salary’ has tripled in the last 30 years. This is a function of Government encouragement for home ownership as well as extraordinary monetary policy and non-existent real wage growth since the 2007-08 financial crisis. Low mortgage interest rates are a benefit to homeowners, but the rise in property prices and sluggish pay-packet appreciation more than offsets this. The result? On average longer periods renting, a requirement for larger deposits, higher mortgages and ergo less opportunity to build wealth. It is not surprising that over a quarter of 26-34 year olds still live with their parents.
Then we have very low savings interest rates, discouraging traditional cash savings because, in the current environment, purchasing power will decline over time as a result of inflation. Now, for a chance of real return, this ‘financial repression’ requires savers to consider riskier financial assets. This in itself can be a minefield for the inexperienced with some reportedly beguiled by promise of attractive returns in foreign exchange vehicles or cryptocurrency only to have their hopes dashed. I would ask our younger readers (or those gifting to them) to consider professional management of their long term savings instead of speculation in volatile asset classes. Low interest rates, the proliferation of easy access credit and a lack of savings opportunities also encourage non-mortgage borrowing. Whether it be personal loans, student loans, credit cards or the explosion of personal contract purchase (PCP) in the car market, the growing burden of debt and risks the ‘credit culture’ brings to long term financial security have never been greater.
Turning to saving for retirement, changes in the pension landscape have placed risk squarely on the shoulders of the young employee. Final salary schemes and the advantages they confer (safe, attractive income streams or substantial transfer values) have mostly disappeared, replaced by often meagre defined contribution schemes where the employee assumes the risk and takes on responsibility for managing their investments and risk profile. I would challenge that many do not even know what they are invested in.
Given the above it is not surprising that grandparents and parents who have the means to assist financially are increasingly considering doing so. Before taking the step, the first thing to ensure is that they do not inadvertently leave themselves overstretched in retirement especially because lifespans continue to rise, while the cost of long term care can be a major burden in the future.
Transferring assets or providing financial assistance to the younger generations is not simple. One has to consider areas such as financial control and tax efficient planning as well as dangers ceding control of significant assets to young people who potentially have limited financial experience. Gifting is the most obvious method of doing this and can involve any sum but, aside from basic annual allowances permitted under IHT gifting rules, gifts are regarded as Potentially Exempt Transfers and at least part of any gift would fall back into the estate should the person making the gift die within seven years. Beyond this, trusts and company structures can be useful in an ‘asset protection’ context.
Gifting while the young person is still a child is another option and in this scenario ‘bare trusts’ can be used. These are simple vehicles where the beneficiary gains access to the capital and income at the age of 18 (16 in Scotland). While there are obvious financial control considerations, there are also tax advantages in that capital gains are taxed to the beneficiary and, if the trustee is a grandparent, this is also the case for income. Generally speaking, the earlier the gift into bare trust is made, the greater will be the impact of compounding returns on the value. Also, a riskier investment strategy may be suitable in the earlier years and this should give the opportunity for higher long term investment returns.
Cornelian manage portfolios within a wide range of Trust and Company structures as well as for individuals personally. We can therefore assist in any transfer of wealth to the next generation and long term professional management thereafter. Gifting though is a complex area and one should always consider specialist advice prior to taking action. Your Cornelian Investment Manager can help with finding the right independent professional to assist with this exercise should you require direction.
Senior Investment Manager