Interactive Investor

Family fortunes: the importance of multi-generational wealth discussions

From avoiding unwelcome surprises and supporting younger generations to trimming your tax bill, there are several benefits to talking about money within the family unit, writes Craig Rickman.

10th November 2023 11:12

by Craig Rickman from interactive investor

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Happy extended family sitting on the sofa 600

If you’re an avid watcher of game shows (like me), you’re probably familiar with Family Fortunes. For those who aren’t, in a nutshell two families of five members go head-to-head, trying to guess the top answers to survey results to win big money.

The families typically span multiple generations, from grandchildren, parents, aunties, and uncles through to grandparents, and occasionally great-grandparents. Naturally, the families who work closely together stand the best chance of winning.

So, what’s the relevance here with your personal finances, you may be wondering?

Well, admittedly it’s a tenuous link, but as I found during my time in financial advice, wealth planning often works best when the whole family unit is involved. There are no cash prizes on offer, sadly, but families who talk regularly and openly about their finances have the greatest chance of sharing and distributing their combined fortune in the most effective way.

This usually involves older generations financially supporting younger ones, but that isn’t always the case. And it’s not just about divvying up wealth. Getting multiple generations involved in the discussions can help introduce younger members to the world of saving and investing, something that will stand them in good stead in years to come.

So, as this year’s Talk Money Week draws to a close, I explore three benefits of multi-generational money conversations in greater detail.

1) To avoid unwelcome surprises

Many of us expect to receive an inheritance from our elders at some point, either during their lifetime or once they’ve passed away. There is, however, no guarantee we will inherit the amount we expect to.

interactive investor’s Great British Retirement Survey found that the average inheritance for those who received one is £54,000, but the average amount expected in the future is £110,000 – a glaring disparity.

Opening up discussions with your children about your financial situation and future plans can avoid unfavourable surprises down the line. Estate planning with professionals such as solicitors, financial advisers and accountants can be more effective when your heirs are involved too.

The relevant parties will have a clearer idea about what they’re likely to receive, understand who is tasked with what when sorting out your legacy, and get a heads-up about how much tax HMRC might take.

Although parents are often encouraged to talk to their children about inheritance tax (IHT) and estate planning, the conversation works both ways. There’s nothing to stop children broaching the subject with their elders. After all, it’s the recipient that gets hit with the IHT bill, not the person who passes away.

2) To distribute wealth to the right people at the right time

One of the biggest hurdles people face in life is lacking the required financial resources when they’re truly needed.

Younger people trying to save a deposit for a first home offers a case in point. People not only tend to earn less early in their career, but are often straddled with university debt, too. In the absence of outside help, owning a property, especially given how high prices have risen over the years, may seem a pipe dream.

In contrast, the wealth accrued by older generations, particularly grandparents, may have left them with an IHT problem that they’re desperately looking to solve. And one of the simplest ways to reduce or avoid IHT is gifting money or assets to younger generations.

Identifying whether children or grandchildren need the most support is why an open discussion here is crucial. If your children are already financially secure, skipping a generation when gifting can avoid exacerbating their own IHT problem, while also helping grandchildren get their feet on the property ladder.

And gifting money while you’re still alive, as opposed to bequeathing assets on death, is a growing theme. A tenth of respondents of our Retirement survey aged over 40 said they had given what they considered to be a living inheritance in the past three years. This was higher among people aged over 65 (15%) with children the most likely recipients (8%), followed by grandchildren (3%).

What’s more, 16% of respondents in the over 40 age group, plan to gift money during the next three years. One respondent to our survey said: “I have already gifted sums to pass on money when they need it most – in mid-life.”

However, financial support doesn’t have to pass down generations. Sometimes adult children are wealthy enough to support their parents, who may have been unlucky with some financial decisions, or seen their finances battered by the rising cost of living. Again, discussing wealth within the family unit offers the best way to support those who need it most.

Family with children 600

3) To help embed good money habits

Multi-generational money discussions don’t only need to involve adults. Passing your financial wisdom to young children can set their relationship with money on the right course.

A study by Red Star Education found that money habits are largely formed by age seven and are difficult to reverse later in life, illustrating the value of starting the conversation early.

The lack of financial education is a well-publicised problem, with only 12% of parents saying their child had received any form of this at school, according to research from Quilter, conducted by YouGov.

Once your children enter their teens, this can be a great time to strengthen their relationship with money. If you’ve taken out a Junior individual savings accounts (ISA) in their name(s) or set up a Junior self-invested pension plan (SIPP), while you’re tasked with making the investment decisions on their behalf, it can make sense to educate them on your chosen investment strategy and explain why you selected it.

Myron Jobson, senior personal finance analyst at interactive investor, says: “While [your children] can’t invest for themselves, you could spark their interest by including them in the conversation and investing in things they might be interested in, for example, Sony if they are a fan of PlayStation.”

Sharing the basics and what you’ve learnt over years about stock markets, interest rates, and inflation will give them a head-start once they reach adulthood and come face to face with big financial decisions of their own.

For instance, they will be more informed about how to manage their Junior ISA once the money transfers into their name at age 18, arming them with the know-how to build their own fortune.

How to get friends and family involved in investing

interactive investor’s Investor and Super Investor plans allow you to gift a number of ii subscriptions to friends and family at no cost.

We conducted some research and found that almost half (47%) of gifted plans are parents adding their adult children to the investment platform, while 44% are being shared with people of the same generation, such as partners, siblings, and friends.

And perhaps most interestingly, it’s not one-way traffic between parents and their offspring. Some 7% of subscriptions have been gifted from children to their parents, highlighting that multi-generational money discussions around saving and investing are indeed taking place.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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