The Press has been awash with articles in recent months on the importance of early engagement and education on Pensions following reports by the Financial Conduct Authority and Investment Association.
The UK regulator has proposed a number of reforms to protect consumers pension pots.
However, one important group of individuals has been left out of the discussions-millennials born in the early 80s to late 90s they now account for one-quarter of the UK population.
Millennials are often regarded as not financially viable customers to discuss retirement planning with due to their lack of disposable income as well as their younger age.
While workplace pension minimum contributions of 5% increasing to 8% next year of qualifying earnings is a start many millennials often do not earn enough to be auto-enrolled and don’t ask to join or opt into their scheme which leaves them at best with inadequate pension provision for the future.
So how can we help those who have little or no money and can’t afford advice. The answer could be to focus on their parents and grandparents.
Wall of Wealth
According to research by Royal London there is a cascading wall of wealth of around £400 billion due to move between the generations in the coming years. This will primarily move from grandparents to parents and then to kids and grandkids. However there’s a problem we are already seeing grandparents die leaving behind them rising inheritance tax (IHT) liabilities and their residual estate to the parents simply passing the problem onto being repeated again.
Funding a millennials pension
As you will be aware every child is eligible for a pension from the day they are born.
A maximum of £3,600 per year can be invested and with 20% tax relief this only costs £2,880 if this contribution was from an estate liable to IHT by using the annual IHT exemption or normal expenditure out of income there would in essence be 60% overall tax relief ( 20% at source and 40% on death).
By making this gift during a lifetime Freddies £3,600 pension is worth 67% more than he had just been left £2,180 on death (£3,600 less 40% IHT) plus any growth. He may not thank you whilst he’s a teenager but he will when he retires.
Potential value after 50 year’s growth
| Contribution plus tax relief | Net growth of 4% pa accrued monthly |
| One off £2,880=£3,600 gross | £26,512 |
| £3,600 per annum for 3 years=£10,800 gross | £76,483 |
| £250 pm for 25 years=£312.50pm gross | £436,008 |
| £1,000 pm for 18 years=£1,250pm gross | £1,132,658 |
Junior and Lifetime ISA’s
For a complete approach to retirement clients could also invest in a junior ISA for Freddie until age 18 when the proceeds could subsequently be invested in a pension and he could have a cash ISA himself from age 16.
Finally each client could gift Freddie up to £4,000 a year to put into his own Lifetime ISA on which he would receive a 25% government bonus. This would again be tax efficient and provide control as it could only be used towards his first property purchase or for retirement from age 55.
Adviser benefits
Aside from the additional business this will generate through your existing clients it will also enable you to start building a relationship with the next generations of the family.
The not so little Freddie may need advice on University Fees, loans, workplace pensions, mortgage protection and of course the pension you advised his parents to start for him all those years ago.
But it will potentially be of greater value when his parent die and he inherits their wealth as you are far more likely to keep those assets under your advice. Additionally the value of a business that encompasses multiple generations will be much higher than one where the core client bank is in retirement and decumulating assets.
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