Involving Children in Your Financial Planning
When it comes to our hard earned money, many of us would prefer that our children had little to no input in our financial planning decisions! We are living in the age of ‘The Bank of Mum and Dad’, so shielding the details of your wealth from the ever-demanding, cash-ravenous eyes of you ‘adult-children’ seems like the smartest move. However, the inclusion of your dependents in your planning could not only benefit them, but could also be pivotal to your financial success.
It possibly won’t shock you to know that the ‘Baby Boomers’ (the generation who were born between 1946 and 1964) are paying out £44 billion each year to their adult children.(‘This is Money’, 2nd November 2013) Young adults are becoming increasingly financially dependent upon their dear, old parents; with 25- 29 years olds being the biggest culprits, demanding up to £2,599 each year to spend on bills, cars and weddings.(‘This is Money’, 2nd November 2013) The ‘boom’ has fizzled out to be replaced with ‘gloom’ in this generation, so it’s time to rekindle the spark and excitement surrounding your wealth.
Education is the best way to help your children. If they are ever to escape the vicious cycle of debt, poor financial choices and impetuous spending, they need to fully understand the impact this will have on their future. Including your children in your financial planning, both at home and at reviews with your adviser, will put them in a strong position in terms of their knowledge and enable them to see the clear benefits of strategic financial planning. It will also enable them to take ownership of the financial responsibilities they have; for both of your futures.
The Budget announcement of this year (2014) has indicated a shift towards a more flexible pension system . This, in our opinion, is a positive move, as it offers retirees more flexibility and choice. However, it may also lead to the temptation to bestow huge chunks of your pension-pot upon your children- not always such a positive! To get their financial spark back, the current ‘Baby- Gloomers’ must start thinking of themselves first and making sure that their hard-earned pension funds provide a steady income stream for their future financial security. Including your children in your retirement planning will help to cement this idea in their minds, and yours, and will help to lay the foundations for a ‘spending plan’ in retirement.
As a product of the Budget announcement, there is talk of ‘Intergenerational Annuities’ becoming a possibility. Traditionally, annuities had a guaranteed period of 5-25 years; given the extended longevity of today’s pensioners, this timescale is unrealistic and falls short of the life-time expectancy of most retirees. However, Intergenerational Annuities will offer guaranteed periods of 30- 40 years. This could mean two things; firstly, that the annuity you buy (if you choose to) should see you through to the end, and secondly, that your children may receive an inheritance from the residual annuity you leave behind. In both cases, your financial planning should take these possibilities in to consideration; to ensure you have sufficient retirement funds and that any inheritance is received by your children in a tax efficient way. Both you and your children need to be involved in this.
Once this plan has been formulated, and a cash-flow forecast has been built, there still may be some scope to give your loved ones an early legacy. Consulting a Financial Planner at this stage is crucial, so that you can ensure that money is gifted in the most tax-efficient way possible. Using vehicles such as Trusts, will put in place structures that enable the money to go where it’s supposed to, when it’s supposed to. The whole family should be involved in this, so that everyone has a clear understanding. In the long-run, these structures will become the responsibility of your children, so it is vital they play a part in the planning stage.
Education, involvement in planning and financial awareness are the key components in evolving ‘the Bank of Mum and Dad’ into your child’s own successful, financial strategy. In an ideal world, your children will inherit your wealth, so it is crucial that they know how to maximise this gift and reduce the amount of risk they take. It’s also important for your future; plotting out your retirement strategy will give you a much clearer perspective. You will be able to enjoy your hard earned money much more and realise your retirement goals. Start encouraging your children to take an interest in financial planning; both of you will benefit.