• Report produced with Brewin Dolphin; incorporates a substantial 11,000-person, nationally representative survey
• Problem: Staggering findings on the scale of the UK’s pensions and savings gap: People underestimate the required size of their pension pots by up to £550,000, whilst a quarter of the UK population admits to saving nothing at all
• Solution: “One ‘silver pound’ gifted and invested today could be worth three times as much to grandchildren later on”: Report calls for an urgent change in attitudes towards inheritance planning with a focus on the earlier transfer of wealth to younger generations
• Brewin Dolphin urges the Government to consider new tax incentives to encourage this early transfer of wealth by the older generation

 

London, 2 November 2016 – Leading UK wealth manager Brewin Dolphin has issued the older generation with a call to action to help address the country’s savings and pensions crisis, according to a major new report out today.

 

Part one of the Brewin Dolphin Family Wealth Report, details the shocking extent of the pensions and savings gap faced by people across the country, a quarter of who admit to saving nothing at all.

 

Liz Alley, Divisional Director of Financial Planning at Brewin Dolphin, comments: “The harsh reality that this country faces, is that the outgoing ‘Baby Boomer’ generation will be the last to enjoy a comfortable retirement unless urgent action is taken now. We are calling for older people to fundamentally rethink how and when they pass on their wealth to younger relatives. The solutions we are proposing today are based on earlier and regular gifting as part of a strategic financial plan, rather than focusing on a one-off inheritance. This could help set grandchildren up for life as well as reduce inheritance tax.”

Summary of findings:

Pensions: The £550,000 gulf between expectation and reality

• 41% of over-55s describe themselves as feeling financially ‘comfortable’ compared to just 26% of 18-44 year olds
• On average, 18-44 year olds think that an income of £30,000 per year in today’s prices would be sufficient to afford them a comfortable lifestyle in retirement (£22,000 personal pension and c. £8,000 state pension). However, they would need a personal pension pot of £725,000[1] to buy an annuity at prevailing rates to provide the level of income required and with improving mortality the cost of this annuity is only likely to increase. However, the average expected size of this age group’s pension pot is just £175,000, revealing a staggering shortfall of £550,000
• To achieve this retirement income an 18 year-old would need to save £437 a month (at today’s prices, adjusted for inflation), a 30 year-old would need to save £793, and a 44 year-old would need to put aside a hefty £1,840, assuming an average rate of return of 4% (net of charges)
• Despite these sizeable pension shortfalls, only 2% of respondents aged 55 or over said they have or would gift money to a relative to top up their pension[2]

Savings: A quarter of the UK is saving nothing at all

• UK households now save only 6p for every pound against 15p in 1992[3]
• 25% of survey respondents say they save nothing at all and 18% save less than 5% of their net income
• Even the higher income groups think they do not have enough spare cash to save, with almost a quarter of respondents (23%) in households with an income between £60,000 – 70,000 saving less than 1% of their net income and 14% of households with an income of £100,000 -150,000 saving next to nothing

Baby Boomers: Have most of the wealth and can make the biggest difference

• The over-65s are sitting on estimated housing wealth of c. £1.3 trillion[4]
• A striking finding is that pensioners’ incomes are rising faster than the median income for the working population due to generous final salary pensions and the ‘triple lock’ on state pensions
• 78% of over-55s who intend to support their family financially, intend to do so by leaving all or part of their assets to relatives via their will potentially exposing their estates to large inheritance tax (IHT) liabilities; 48% intend to support relatives with one off costs e.g. weddings; but only 30% intend to make regular financial contributions as part of their estate planning

Liz Alley adds: “Our findings show that whilst we may be a challenged nation when it comes to savings, we are also a generous one when it comes to passing on wealth. However, often this wealth is being transferred in an inefficient way. Only a small percentage of people have thought beyond one-off gifting with their inheritance planning. A huge difference could be made by making regular contributions to a grandchild now via a JISA or pension.

“The potential long term investment growth, the effect of compounding and the IHT savings from this approach means that one silver pound gifted and invested today, could be worth three times as much to grandchildren later on.”

Brewin Dolphin calls on the Government to consider new tax incentives:

• Introduce a Saving for Grandchildren tax incentive scheme that would see a gift of 10% from a grandparent’s estate reduce their IHT rate from 40% to 36%, similar to the current charitable giving scheme
• All gifts to a grandchild’s JISA and pension are immediately free from IHT (instead of the current seven-year rule)
• Offer tax relief on a grandparent’s contribution to a grandchild’s personal pension
• Increase the personal allowance by the amount gifted to grandchild’s pension
• Offer tax relief on a grandparent’s contribution to university tuition fees

 

Liz Alley said: “Given the scale of the pensions and savings crisis faced by younger people, we are calling on the Government to consider new tax incentives to encourage older generations to pass on their wealth sooner, such as making gifts to a grandchild’s JISA and pension immediately IHT free.”

 

Set your grandchildren up for life: Brewin Dolphin’s key recommendations

To address the large savings and pensions shortfall identified by the report, financial planning experts at Brewin Dolphin are calling for Baby Boomers to act now following the advice set out in the worked example below.

As Liz Alley explains: “The goal here is twofold: ensure our older clients are safe in the knowledge that they have sufficient funds to enjoy a comfortable retirement. Second that they put in place a strategic financial plan that through regular contributions builds two funds for their grandchildren: a ‘Life’s Events Fund’ to cover big one off costs like university tuition or a house deposit and a ‘Later Life Fund’ to help close the large pensions gap they face when they retire.”

 

Worked Example[5]

Margaret is 62, retired and divorced with a pension annuity income of £45,000, of which she spends £20,000 on herself and saves the rest. She has an estate of around £1 million, roughly half of this is her home (un-mortgaged) and the rest is savings and investments. She has one son (Luke) – aged 45, who has three children aged six months, three and 10 years old respectively.

 

Priority 1) How much does Margaret need for herself?

Margaret already has an inflation proofed pension, and receives more than she needs to maintain her standard of living. In theory, she is set up for life. Margaret decides to account for emergencies by keeping £20,000 (one year’s expenditure) aside in the bank.

Priority 2) What would Margaret need to do if she needed care later on?

After careful consideration Margaret decides that if she needed full time care, she would fund it by selling her home in the future. Based on the current value, £500,000 could fund residential nursing care for a number of years.

Priority 3) How can Margaret help set up her grandchildren up for life? Set up a ‘Life Events’ Fund and a ‘Later Life’ Fund:

Margaret commits to saving £1,740 per month for her three grandchildren out of her surplus annual income of £25,000. By setting up a regular commitment in this way, these contributions would fall under the “normal expenditure out of income” exemption, making the gifts immediately and completely free of inheritance tax.

In total, she plans to give £1,740 per month to her three grandchildren using a mix of JISA and pension investments up until each grandchild is 18 years old[6].

Using the calculations overleaf and assuming a conservative two percent return on her JISA and pension contributions, Margaret would, for example, be able to save the following amounts for her youngest grandchild:

• Life Events Fund: £88,995 in a Junior ISA by the time her youngest grandchild is 18 (saving from birth)
• Later Life Fund: £180,391 in a pension by the time her youngest grandchild is 60 (saving from her grandchild’s birth, and assuming no further contributions after the age of 18)
• In addition, the total financial benefit to Margaret’s overall legacy, using the savings plan for all three grandchildren and incorporating the savings she makes in IHT, could be almost £400,000 (Her legacy after 18 years could be worth £1,582,299 instead of £1,200,890)

Liz Alley concludes: “Better planning and regular gifting makes for an enjoyable retirement and could help set grandchildren up for life. What we are saying to our clients is that this solution can make the kind of difference that many of their grandchildren will need.”

 

Life Events: One of the main savings plans for children is the Junior ISA (JISA). The allowance in 2016/17 is £4,080 per annum, or £340 per month. For the three grandchildren, it would cost £1,020 per month to fund the JISA in full. In this scenario, Margaret can afford to fully fund JISAs for all of her grandchildren out of the spare income she gets from her annuity without having to make any changes to her spending habits.

Without any changes to the JISA allowance, up to when the grandchildren are 18 and can access the money, they could save:

 

Age when savings started	How much can be saved into a JISA up to age 18? (£340 / month)	What is this worth at age 18 with 2% interest?
0[7]	£73,440	£88,995
3	£61,200	£71,968
10	£32,640	£35,718

 

These sums are available to the grandchildren when they turn 18 and can be withdrawn without any tax. These could be used to help them with one-off costs like buying their first car or helping them through university. If they look after the funds, they could also be used for their first house deposit or a wedding fund.

Later Life: Whilst Margaret’s grandchildren don’t have any earnings, she can still pay £240 per month into pensions for all of them. Each of these contributions then receives £60 per month in tax relief, creating a total contribution to each grandchild of £300 per month. This costs Margaret £720 per month.

Without any changes to the pension allowance, up to when the grandchildren are 18, they could save:

Age when savings started	How much can be saved into a pension up to age 18? (£240 / month)	What is that worth with tax relief?	What is that then worth when they are aged 60? (assuming 2% return)
0	£51,840	£64,800	£180,391
3	£43,200	£54,000	£145,878
10	£23,040	£28,800	£72,401

 

 

If Margaret wasn’t able to afford all of these, she could consider some different figures:

Age when savings started	Save £50 per month assuming 2% return		Save £100 per month assuming 2% return
	Pension (with tax relief) to age 60	JISA up to age 18	Pension (with tax relief) to age 60	JISA up to age 18
0	£37,581	£13,087	£75,163	£26,175
3	£30,391	£10,583	£60,782	£21,167
10	£15,083	£5,252	£30,167	£10,505

 

What are the IHT benefits?

As mentioned above, these monthly payments are being taken from her spare income and are therefore free of inheritance tax.

The monthly payments to each grandchild from surplus income, up until they are each 18 years old equate to £285,360 in total.  If this amount was retained in Margaret’s estate rather than being gifted and grew at 2% it would be worth £356,570.  The 40% Inheritance Tax on this would be £142,628

 

	Effect on Margaret	Effect on her estate* (assuming death in 18 years)	Effect for her grandchildren	Margaret’s Legacy
Do nothing	No impact on her personal standard of living – she can afford to give away the money	The existing estate at £1,428,246 likely to pay £441,298 of Inheritance Tax**   The estate also due to accrue further income, with interest worth £356,570, paying £142,628 in tax.   Over 18 years, after inheritance tax the combined estate is worth £1,200,890	They get nothing from Margaret’s estate because it is inherited by their father	£1,200,890
JISA & Pension savings		After Inheritance Tax of £441,298 the estate is worth £986,948	They have between them £196,681 in Life Event Funds; and £398,670 in Later Life Funds	£1,582,299

*Due to be inherited by Luke

** After taking away £325,000 for the Nil Rate Band Margaret is no longer married therefore does not benefit from the transfer of her spouse’s nil rate band. The rest of the estate is taxed at 40%. The value of her £1,000,000 estate has also been projected to grow at 2% per year over 18 years. For the purpose of illustration no account has been taken for the Nil Rate Band to increase in future, nor has a future Main Residence Nil Rate band been considered.

In part two of the Brewin Dolphin Family Wealth Report we will look at how the younger generation’s university debts place a huge burden on their income for years to come. If a family member can help, this would reduce the need for a new graduate to enter their working life with significant levels of debt.

[1] Model calculation based on an inflation-linked annuity for a healthy single, non-smoker, without dependents or a guarantee period, not taking out a tax-free sum.

[2] Of those survey respondents who disclosed they have or would help a relative financially.

[3] ONS savings ratio data.

[4] Total estimated using average values of homes and average adult household size from Understanding Society Wave 5 (2013/14), which was restricted to homeowners and excluded the top and bottom 1% of values; weighted and adjusted for sampling design (clustering & stratification); and, applied to population estimates and projections from the Office for National Statistics.

 

[5] This example has been built using Margaret’s spare income to achieve a tax efficient savings outcome for her grandchildren. She could also gift some of her existing capital if needed and would have a £3,000 per tax year annual IHT exemption that could be utilised. For the sake of simplicity this has been excluded from this example.

[6] The total monthly contributions by Margaret would reduce as each child reaches 18 years of age. For instance, when the eldest child turns 18, the total monthly contribution of £1,740 would reduce by a third (£580 per month) to total £1,160, split equally between the two remaining grandchildren. When the second child turns 18, Margaret’s monthly contribution would reduce by a further £580 per month, paid to the youngest grandchild.

[7] For the purposes of this calculation, even though the child is six months old a full year of contributions has been assumed.