Talking to clients about wealth transfer across generations

Our experience working with external financial planners suggests inheritance tax is an increasing concern for clients. To get the best outcomes, it's vital to have the right investment engine

20 Jan 2021

Davydd Wynne

Davydd Wynne

Portfolio Director

Intergenerational wealth planning is set to become an even more important part of an adviser’s work in the decades ahead. The “baby-boomer” generation is set to transfer a huge slice of property and other wealth to the next generation – and it will be up to financial advisers to manage this often highly complex process.

The best way to achieve that transfer of wealth will be down to the individual client, their wider family and their adviser, but it is likely that they will need to keep their options open in terms of the types of investment products they use.

Standard options such as pensions, offshore bonds and ISAs will all be part of the armoury, but more complex arrangements, such as Aim investment portfolios (for inheritance tax mitigation) may also play a part.

Getting a flexible investment base in place

Crucially, the underlying investment engine has to be flexible and effective within all of these approaches so as to be most tax efficient.

Our role is to ensure that client assets are working as hard as possible within the parameters set by each generation – and in the most tax-efficient way. This can be demanding. Often an investment strategy designed to generate an income to support the older generation in retirement is not the strategy that will suit their heirs. The older generation needs income: the children generally have a long-term growth horizon.

The conversation is an opportunity

This requires an important conversation, and in many cases provides an opportunity for advisers and planners. They need to establish the extent to which the older generation is willing to compromise their income, for example, to support the capital requirements of the next generation.

Often an investment strategy designed to generate income for an older generation, is not the strategy that will suit their heirs

The level of income that can be consistently – and sustainably – withdrawn from an invested portfolio has  undergone reappraisal in our post-crisis era of long-term ultra-low yields.

Striking a balance between the two generations' needs

There is a balance between the older generation’s well-being and ensuring sufficient growth in their assets to maximise their bequests.

Advisers will be able to manage client expectations, discuss outcomes for their wealth on their journey, assessing risk both in the shorter and  (arguably for the benefit of their heirs) longer term. The transition needs to be carefully managed. Working closely with external planners, our priority as portfolio providers is to ensure on the investments best match clients’ individual journeys.

Any transitions may have implications for the distribution of client assets across tax wrappers. For the older generation, income assets may be best placed in a gross environment, while assets more likely to generate capital gains may be “unwrapped”.

Younger generations may have less use for income, but it will still be important to maximise the use of tax incentivised saving schemes such as ISAs or pensions. Looking at family wealth holistically to maximise all allowances is vitally important. It also naturally leads the adviser to speak with younger members of a client’s family, where appropriate.

Pension "freedoms" have allowed greater planning opportunities

Various changes to the pension and inheritance tax rules in recent years have made it easier to pass wealth between generations tax effectively. At the same time, they have brought more planning complexities. ISAs can be passed from husband to wife, for example; while pensions can be more readily transferred to children.

We believe the investment strategy needs to adapt with these changes, making sure the those managing the investments are adequately resourced to build these flexible solutions. Investment managers need the widest possible toolkit, incorporating – where appropriate – access to alternative assets, Aim portfolios, structured products and private equity. This provides ways to moderate the volatility, or potentially maximise the efficiency, of that journey.

Of course, capital preservation itself is vital. Clients have spent a lifetime building their wealth. Even where clients could take more risk, many are reluctant to do so – and we understand that.

We work with external advisers and planners in many ways, but our ultimate role is always to facilitate the plan devised and agreed between the adviser and their client. The financial adviser makes the strategy and we – bringing to bear our experience, global resources and full suite of products – implement it in the most effective way.

Statements concerning taxation are based on our understanding of the taxation law in force at the time of publication. The levels and bases of, and reliefs from, taxation may change. You should obtain professional advice on taxation where appropriate before proceeding with any investment.


Davydd Wynne

Davydd Wynne

Portfolio Director

Davydd joined in 2007 and is a Portfolio Director within the DFM team and Head of Structured Products. Davydd joined after seven years at Rothschild Private Management where he was a Director with responsibility for managing both onshore and offshore private client portfolios. Prior to Rothschild, Davydd worked for C. Hoare & Co and Gartmore. Davydd is a full member of the CFA Institute, has an MBA from the London Business School and has over 20 years’ investment experience.


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