Future wealth

The average British child is worth just under £5,000 by the time they reach school.

When we talk about the Bank of Mum and Dad, we are effectively talking about handing money over to your children. There are many reasons why your descendants might look to you for financial support, and many routes you could take in funding them, if you so choose.

All children, regardless of means, benefit from learning simple concepts like saving to attain goals and operating within a budget. That can start with pocket money for non-essentials and mature into allowing teenage children to manage their own clothing budget or take control of a portion of the family’s charitable donations. You may even want to allow older teens to allocate and manage a small portfolio for exposure to investments.

Children’s key life moments

A nationwide survey[1] of parents has revealed the wealth that average British children have accumulated by the time they reach adulthood, with the average UK child having amassed just under £5,000 by the time they reach school at the age of five, just over £10,000 by the age of 18 and £12,000 by the time of their 21st birthday.

The majority of UK parents surveyed said they began saving for their children’s key life moments when they were five years old, with 27% saying they started before their child reached their first birthday and 15% even admitting they began before their child was even conceived!

Making their own money

The findings revealed that £125 a month was the average amount that parents put aside for their child’s future each month. 39% of those who responded said they feel it is the duty of every parent to save for their children, whilst 55% believe it is their duty but admit they can struggle with the obligation.

One in 20 (6%) insist their children should make their own money and their own way in life, without assistance from their parents.

Best possible start in life

Everyone wants to do right by their child but we appreciate it’s not always easy. Instead of large presents on birthdays or at Christmas, consider using part of the budget to save for their future.

The majority of parents want to give their child the best possible start in life, but what are the best ways to invest for children? Some ways of passing money on to your children can start very early, including putting money into a Junior Individual Savings Account (JISA) for your child.

Helping the younger generation

The current annual allowance for contributions is £9,000 (tax year 2022/23), meaning that if you start paying into an JISA when your child is young, they could find themselves with a sizeable sum of money by the age of 18.

Focusing on later life stages, some parents might also consider contributing to their children’s pension pots. Covering school fees and other expenses for grandchildren is another possible way to help out younger generations financially. But with house prices at historically high levels, the most common ‘Bank of Mum and Dad’ queries we receive concern helping the younger generation onto the property ladder.

THE VALUE OF INVESTMENTS CAN FALL AS WELL AS RISE AND YOU COULD GET BACK LESS THAN YOU INVEST. IF YOU’RE NOT SURE ABOUT INVESTING, SEEK PROFESSIONAL ADVICE.

Source data:
[1] The research of 1,500 parents with dependents currently living at home with their parents, was commissioned by Perspectus Global in March 2021 on behalf of Brewin Dolphin.

Gender Pension Gap widens

Women have lower pension pot sizes in every age bracket.

The staggering impact of the gender pension gap has been revealed in new research[1] which shows that women have lower pension pot sizes in every age bracket, with the situation significantly deteriorating as they approach retirement. Worryingly, women on average retire with less than half the income of men.

Gender pension gap by pension contributions: age gap in pension contributions

20-24 13%
25-29 16%
30-34 15%
35-39 18%
40-44 23%
45-49 29%
50-54 35%
55-59 40%
60-64 45%
65-69 49%

Reduction in contributions paid into pensions

The amount paid in contributions has a big impact on what is received at retirement and the difference between men’s and women’s contribution rates is stark. For most people, the effect of working part-time means a reduction in contributions paid into their pension.

If a person opts to reduce their full-time working hours to three days a week, they might expect their pay and their pension contributions to reduce by 40%. However, because of auto-enrolment (AE) thresholds, the impact could be greater than that.

Good financial planning

A person earning £30,000 opting to reduce their hours by 40% would see their pay reduce by 40%. However, because of the lower qualifying earnings threshold (LET) under AE, their pension contributions would reduce to around 50% of their full-time value. A worker earning £20,000 would see their pension contributions reduce by over 58%.

Pension contributions are unlikely to be a deciding factor when considering whether to work part-time. What is important is that people understand the long-term impact on their pension when they are making that decision. This is crucial to good financial planning.

Upping pension contributions

Some people might consider upping their pension contributions, but this would have to be carefully balanced against disposable income. Another option some parents may consider is sharing the caring responsibilities to help spread the long-term financial impact.

One significant change to help women in this position would be to remove the LET. It has the potential for the biggest impact on closing the gender pension gap and has been promised by government for the ‘mid-2020s’.

How to help close the gender pension gap

If you are working part-time and are automatically enrolled into a workplace pension scheme, consider increasing your monthly contributions, if it is affordable.

If you earn less than £10,000 per year, speak to your employer about your options for joining your company pension scheme.

If you are thinking about reducing your working hours to help balance family life, you might want to consider whether it is better for you or your partner to work part-time. As part of those considerations, you might want to look at which of you gets higher employer pension contributions.

When it comes to saving into a pension, starting early allows a small contribution to build up over time.

For those in a long-term relationship, have a stake in your finances. Should divorce ever come into the picture, keep pensions at the forefront of your mind when splitting assets.

Check your National Insurance record to see if you will get the full State Pension amount when you retire. You need a total of 35 years of National Insurance contributions, or, in some cases, you can apply for credits. If it looks like you might be short, you might have the option to pay to fill in the gaps.

Apply for Child Benefit even if your overall household income means you need to pay it back through a high-income Child Benefit charge. If you are not working while looking after a child you get State Pension credits automatically until your youngest child is 12 years old as long as you are claiming Child Benefit. If you do not claim Child Benefit you do not receive the credits.

Talk to your employer about the policies they offer.

Source data:
[1] Aviva Workplace Pension Data: Percentage difference in mean total contributions paid in January 2022, men versus women, by age group, based on a sample of 2,073,000 workplace pension plans receiving contributions in the month.

More Britons insure their homes than their lives

Ensure your financial security for when you might need it most.

There are a number of reasons why you might need life cover and critical illness cover. If you have dependents, then it is important to make sure that they will be financially secure if something happens to you. If you have a mortgage or other debts, then life cover can help to pay these off.

Critical illness cover can provide you with a lump sum of money if you are diagnosed with a specified serious illness, which can help to cover the cost of treatment and make sure that you and your family are financially secure.

Not so keen to insure our own lives

But, according to new research[1], only 32% of people in the UK have life insurance compared to 64% who have taken out an insurance policy to cover their homes. Showing that there is still some truth in the old adage ‘An Englishman’s home is his castle’, it would seem some people place more importance on insuring their homes than their lives.

The figures reveal that whilst we’re happy to protect our latest iPhone purchase (14%), our upcoming holiday from the unpredictability of COVID (21%) and our furry four-legged friends (19%), we’re not so keen to insure our own lives to protect our loved ones.

Reluctant to think about our own mortality

Indeed, 66% of people aged over 35 do not have life insurance cover, and a further 84% do not have critical illness cover. Whilst 58% of people with pet insurance and 47% with mobile phone insurance have not taken out life insurance.

It is not unusual for people to be reluctant to think about their own mortality, especially younger people in their 30s and 40s. However, it is important for people during the accumulation phase of their lives, which is generally those under 50, to think about protecting their financial journey.

Transfer risk to an insurance provider

Taking out life insurance and critical illness cover can help to transfer risk to an insurance provider. It is a way to help protect the journey towards meeting your financial goals.

Almost a fifth of the respondents (19%) who have life insurance in place said they do not have, or they are not confident that they have, sufficient life insurance to pay off their debts and provide for their dependents should the worst happen.

Protect your family or other loved ones

Less than half (45%) of those polled say their existing life insurance policy will cover their mortgage and only a quarter (24%) say it would cover their current salary. A further 15% say it will only cover the basic cost of living for their dependents, 4% realised that their current policy covers a previous salary which is lower than their current earnings, and 20% admit they simply don’t know how much their life insurance would cover.

Whether it’s to protect your family or other loved ones, it is important to take professional advice and make a plan, which can be reviewed regularly, to ensure that the people that matter to you are taken care of and that your financial goals can be achieved.

Source data:
[1] The research of 1,000 nationally representative UK adults was commissioned by Find Out Now in November 2021 on behalf of Brewin Dolphin.

Passing on wealth to the next generation

30 million parents want to leave wealth in their Will.

Research[1] has highlighted how millions of Britons say they want to plan to pass on wealth to their children and grandchildren in a Will – but fewer than half have written one. Failing to plan write a Will or complete estate planning could potentially lead to a significant Inheritance Tax (commonly called IHT for short) bill being levied on a person’s estate when they die.

Anything that isn’t exempt will be taxed

IHT is a tax that may be paid on your estate (your money, possessions and your share of any property) when you die, reducing how much value will ultimately pass to your beneficiaries. The starting point for IHT in the current 2022/23 tax year is £325,000. When the value of an estate exceeds this amount, anything that isn’t exempt will be taxed at 40%.

The tax year runs from 6 April to the following 5 April. So, the tax year 2022/23 started on 6 April 2022 and finishes on 5 April 2023.

Rising number of people could unexpectedly face IHT bills

Recent rises in houses prices mean the estates of a rising number of people could unexpectedly face IHT bills. The research found that 30 million (88%) people with children say they plan to leave money to their children and/or grandchildren in their Will but only 41% have written one. Twenty million (59%) parents do not currently have a Will.

Although over half (57%) of people with children are considering seeking professional financial advice about the best way to pass on wealth, only 13% have done so. More than half (56%) of people with children say they are considering writing wealth into trust but only 12% have actually done so.

How parents plan to pass on wealth

Leaving it in a Will 88%
Bank transfer/cash 67%
Consulting financial adviser 57%
Writing wealth into trust 56%
Putting money into investment 53%
Putting money into a pension for their children 43%

Minimising the amount of IHT you could be liable for

The research identified that mass affluent consumers – those with assets of between £100,000 and £500,000 excluding property – are more likely to have their affairs in place to pass on an inheritance. More than half (51%) of mass affluent parents have a Will in place. 20% of mass affluent parents have put money into an investment for their children or grandchildren (compared to 12% of all parents).

17% of mass affluent parents have obtained professional financial advice to discuss the best way to pass on wealth. And 13% of mass affluent parents have written wealth into trust for their children. The average amount written into a trust was £184,000 while more than one in five (21%) wrote more than £250,000 into a trust.

Source data:
[1] LV= surveyed 4,000 nationally representative UK adults (of which at least 500 were mass affluent) via an online omnibus conducted by Opinium in December 2021.
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email: info@iftwm.com

Month: June 2022