Is it time to start investing for the next generation’s retirement?
28 May 2012
GRANDPARENTS are being advised to set up pensions for their grandchildren following a report suggesting babies born today will be 77 before they receive a state pension.*
The rising retirement age, topped with increased life expectancy means the average person will now spend more than 20 years in retirement. This is a financial burden many young adults can’t even begin to prepare for in the current economic climate.
Wealth management expert, Colin Lawson, managing partner at Equilibrium Asset Management, has noticed a growing number of clients request investment strategies for their children and grandchildren as part of their overall investment portfolio.
Colin said: “Pension ages increasing, high student debt, rising house prices, low annuity rates, withdrawal of final salary pensions and living longer in retirement has created a ‘perfect storm’ meaning that creating a pension pot big enough to retire at a realistic age will be out of reach for many of the next generation.
“Today’s older population realise how tough it’s going to be for younger generations so are looking for ways to help. We’ve developed a number of interesting investment strategies for parents and even Grandparents such as a pension plan for a baby and family trusts. Many of these investments bring the additional benefit of tax relief.”
Here are Colin’s top tips for investing for retirement
1. Pension plans for young ones
Investing early can solve a child’s pension’s problems for life. Clearly pensions are long term, but by solving this important issue frees up money for the child to repay student debt or increase mortgage payments as they no longer need to pay as much into a pension themselves.
If you invest 4 years maximum contribution of £2880 net/ £3600 gross, this could be worth £2,658,761 at an age of 65 if you achieve 9% pa growth
Even just one contribution can make a significant difference creating almost £10,000 of income in today’s terms, by the time they reach the age of 65.
The idea has proved so popular with Equilibrium’s clients that to date approximately 20% of clients have set up over 180 pension policies for their children or grandchildren.
2. Emerging markets
With a potential 65 year investment time span we recommend taking a speculative approach so clients could consider investing in China or other emerging markets.
3.Plan for inheritance tax
Don’t forget about IHT when planning for your loved ones’ future. If four years contributions of £2880 = £11,520 were retained in the estate this would net down to £6912 if 40% IHT is payable.
The position is often worse as in many cases the money is passed from Grandparent to Parent and taxed at 40% and from Parent to Grandchild and taxed again. This is why developing an investment, such as a pension, creates a greater added benefit to further generations.
Before making any decisions on financial investments and pensions, think carefully about your options and seek expert advice.
*According to report from business advisers PwC
For more information, or to set up an interview with Colin Lawson, please contact Lucy Oates or Dan Gledhill at RMS.
Telephone: 0161 927 3131