Balancing intergenerational wealth planning during a care crisis

The pandemic has more people concerned than ever as to how they will pay for their future care while still having the assets to pass down to children.

But there are ways advisers can help clients prepare.

With 14m in the UK currently living without the care they need due to a lack of resources, the pressure is on for families to ensure they are financially prepared for later life.

The increasing costs associated with care is having a detrimental impact on people’s quality of life, with those that need residential care, for example, having to fork out an average of £600 per week.

Under current rules in England, an individual with assets over £23,250 would be expected to cover the entire cost of their care needs – a low barrier for those that have been building their wealth over their working life to fund their golden years and pass on to future generations.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, explains that the cost of care is higher than most people imagine.

“Covering the cost of care is difficult enough if you’ve planned for it, but if it comes out of the blue, it can be even more challenging. Charges average £600 a week for residential care, or £800 for a nursing home. But if you’re in a more expensive part of the country or you have complex needs, you can easily spend £1,000 a week,” she says.

“A few hours of care at home each week can be much less expensive, but if you need live-in care, costs are between £1,000 and £2,000 a week. There’s a reason why, when talking about paying for care, one of the categories is ‘catastrophic costs’ – when the total hits £100,000 or more in your lifetime.”

While these costs are an increasing concern, older generations still worry for their children and grandchildren. Older generations, or baby boomers, have benefitted from good investments and rising house prices – official figures have shown the average UK house price rose by 10 per cent in the last year.

However, rising house prices mean that their children and grandchildren are saving for an average of 6.6 years for a mortgage deposit, according to Yes HomeBuyers research.

Similarly, university debt is on the up and expected to reach £560bn by 2050 so it is no surprise that parents and grandparents want to help out their younger family members financially as much as possible.

OneFamily’s financial study found that baby boomers and generation Xers have handed more than £8.2bn to family since the start of the Covid-19 pandemic. Yet the data showed that 44 per cent of over 50s who had lent money had put a strain on their finances in order to do so.

For older generations who want to pass on large proportions of their wealth, it is essential that they are realistic about the future possible costs of their care.

Krupesh Kotecha, financial planner at Balance Wealth Planning, says that the care crisis and resulting pressure of cost on the individual has sparked a change in future financial preparation.

“Clients used to feel aggrieved when they felt they’d been prudent with their money”, he says, adding that they considered it an unfair advantage when those who had not been careful with their money were taken care of by the state.

Kotecha adds: “They felt this was an unfair system because it meant they hadn't spent as much as they could have during their lifetime or that their family will lose out on wealth they were hoping to pass on. However, given the chronic underfunding in state care, the lack of provisions available, and the vast differences in care services, clients now see the benefit of having the money available to choose the type of care they want for themselves.”

The key to easing the complexities of intergenerational wealth planning is family communication.

Research from wealth manager business Killik & Co found that 60 per cent of the sandwich generation – those looking after their elderly parents and children simultaneously – have never talked about the cost of care with their parents, while 17 per cent have never even thought about it.

Svenja Keller, head of wealth planning at Killik & Co, says that for financial planning across multiple generations communication is essential.

“When it comes to family finances, especially across multiple generations, open and regular communication is critical. The pandemic has affected all generations, and it is natural for more senior members of the family to be concerned with ensuring that those younger members of the family are cared for.”

Communication between different generations of the family can help the planning process so that everyone is on board with the direction of the family finances.

Keller also highlights that families should be discussing more than just the financial aspects of planning for care. Considering the various options for care and their associated costs can help families set their priorities and the direction of their finances according to their preferred solutions.

The same level of communication should also apply to advisers. It is imperative that they start the conversation with clients about their future and the different circumstances that could impact their financial plans as early as possible.

Neil Jones, tax and wealth specialist at Canada Life, explains that starting early can prevent clients being caught out by rules against purposeful deprivation.

“When considering any assessment for care costs it is important that assets are not structured in a way to focus on the removal from an assessment. There is a rule known as ‘deprivation of assets’ allowing a local authority to continue to use assets for the assessment where they have been deliberately moved or structured in order to avoid long-term care costs,” he says.

“By starting planning early this is less likely to be an issue and a professional adviser will be able to help ensure investments and assets are structured in the most efficient way to maximise flexibility for any potential requirement and to maximise the value of an estate.”

When it comes to balancing intergenerational wealth one of the biggest issues facing those preparing is the unknowns of what will happen to them.

Questions concerning whether the care will be in-home or at a residential home, when will the care start and how long will it need to last, can cause considerable uncertainty and worry for clients.

In response to this, advisers are increasingly using cash flow modelling to ease these concerns for clients. This tool uses a detailed picture of a client’s current financial affairs and then, taking into account relevant data such as interest rates, inflation and income changes, can illustrate different possible future scenarios and put them into context.

Balance Wealth Planning's Kotecha highlights this gives clients “a peace of mind that it’s not an unknown number with a cloud of confusion”.

Advisers are in general agreement that cash flow modelling is essential for retirement and care planning. However, research by Intelliflo earlier this year showed that only 34 per cent of advisers were offering cash flow modelling to all their clients, with 8 per cent not offering the tool at all.

Intelliflo also warned that advisers were not using the tool regularly or at crucial junctures in their clients’ lives, failing to reap the benefits of the tool.

The effectiveness of cash flow modelling tools can lie in their delivery. Intelliflo recommends advisers deliver the tool regularly and live to clients, engaging them in the advisory process along the way.

Gareth Kerr, head of sales proposition at Intelliflo, explained: “We’ve found that financial advisers getting the most from cash flow modelling are using it live with clients whenever there is a shift in long-term plans to monitor and plan for what lies ahead.”

Passing on accumulated wealth to future generations, however, remains a top priority for many and in order to protect that wealth many will consider lifetime gifts.

Noreen Walker, technical adviser at SimplyBiz, says: “We often receive queries about clients making gifts within their lifetime and, when the client has both demonstrable full mental capacity and a clearly expressed wish to make the gifts, it can be the right course of action, provided they are not depriving themselves of assets in order to apply for means-tested benefits.

“Assets that are needed during a client’s lifetime, such as the private residence or those assets needed to fund care, should not be gifted, whereas gifts to reduce IHT can be made.”

There are options for those clients uncertain whether they might need access to the money in the future.

Canada Life’s Jones says in this case advisers might suggest to clients the option of a flexible reversionary trust (FRT). The FRT is designed to allow clients to gift money while retaining access to the capital as and when needed.

“The subject of sheltering money from long-term care assessment can be difficult and create a dilemma. While there may be an objective to maximise the money available to the beneficiaries, the family will want to make sure that the elderly or ill are catered for and are cared for comfortably. Using a trust allows the settlor to decide if they need more or not, again providing flexibility.”

He adds that clients can also consider using business relief schemes that allow full access to the money but carry a higher risk profile.

By explaining the various options for gifting money to younger generations and the associated risks, advisers can help clients make the right decisions for their future finances.