Wealth planning to protect your legacy

Wealth planning to protect your legacy and benefit your kids is often a top priority for parents; after all, The Bank of Mum and Dad has reshaped the British economy. It funds education, home ownership, and the partnering up of wealthy children with equally wealthy children. But now we have a government with a tax-and-redistribute approach, a large mandate and (since 1945) an electorate that likes to give governments second terms. What does this mean for the Bank of Mum and Dad’s future solvency?

The oldest bank in the world

The International Monetary Fund (IMF) measures bank solvency – that’s the risk a bank doesn’t have the assets to meet liabilities.

They assess every bank worth its salt apart from the oldest and perhaps the biggest: the Bank of Mum and Dad.

Of course, the IMF doesn’t need to send its auditors round. It’s plain to see the bank of Mum and Dad, for those not experiencing the cost-of-living crisis, is nicely solvent, for now.

Children of wealthy individuals tend to be set for life these days. For example, parents provide vast amounts of help to first time property buyers, as this YouGov survey shows.

Yes, the numbers dipped of late, but we had a huge economic crisis and, anecdotally, most of our clients are still helping their children in this way.

Wealth (management) begets wealth

Wealth is sticky. The Institute of Fiscal Studies shows that children of the wealthiest fifth of parents are eight times more likely to be in the wealthiest fifth themselves than are the children of the poorest fifth.

Wealth persistence – as they call it – across generations can be accounted for by the intergenerational persistence of education and earnings.

Moreover, if you have wealthy parents you tend to save more of your money and – if you have a partner – they’re more likely to be higher earning.

The role of a Wealth Manager

People like us play a pivotal role. The wealth management industry is huge: this year, $11 trillion in the UK alone, according to a recent assessment by Statista. That’s £8.7 trillion in ‘real’ money! By the end of this decade those numbers could be over £10 trillion.

Part of that will be new money coming in: direct debits, lump sums, your bonus and so on. The rest will be investment performance. This year the FTSE 100 returned about 8%, and the American market a remarkable 28%.

That said, we never think about such short-term numbers. The long term is the only thing that counts; and 150-year data say equities will pay you about 4.8% a year without dividends and 9.4% with. It’s hard to argue with that.

Keeping the bank solvent

But – like a slow-motion action movie sequence – spanners are tumbling towards the works, with two perhaps bigger than most.

Spanner One

One is the newly changed inheritance tax rules. From April 2027, any pension assets above £325,000 that you wish to pass on but not to a spouse, civil partner, charity, or community amateur sports club will be subject to a 40% tax. If that happens after you pass age 75, your beneficiary will also have to pay income tax on the money.

There are ways to ameliorate this, so please get in touch if you’re worried.

Spanner Two

The second spanner is the cost of long-term care. We’re all living longer. According to the Office for National Statistics (ONS) a 50-year-old today should expect to live another 34 (female) or 31 (male) years. They’ve nudged upwards even in the last ten years. How much of that time will be spent in ill health? It’s hard to say but what we do know is that care homes aren’t cheap: a whopping £1,410 a week (or £73,000 a year).

And then there are SKIs. You may be fit enough to head off to Meribel but I’m talking here about the possibility you’ll Spend the Kids Inheritance – maybe on cruises followed by nursing costs. Your children may even need to fund your retirement.

Sobering stuff.

Which takes us back to our starting point. The Bank of Mum and Dad is nicely solvent. But it very much needs careful management to stay so.

If you’d like to discuss your plans for looking after yourself and your loved ones, we’re available on 020 7467 2700 or hello@firstwealth.co.uk.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.