There are six ways that the Baby Boomer generation and beyond can build a financial plan for the next generation.

Whilst it may appear to be a daunting task it needn’t be. All that is required is for parents and grandparents to discuss with their children and grandchildren how they intend to pass on their wealth and then build a financial plan around it.

While the pandemic has been a reminder of how unpredictable life can be, it has also served to help people realise the importance of becoming “financially prepared for the unexpected”.

These are the six ways to set up a financial plan for the next generation.

1. Get yourself financially organised

The first step is to assess your own finances: how much can you afford to set aside each month without it impinging on your lifestyle or affecting your ability to service regular monthly commitments?

Equally, you need to determine the level of capital you need or want to retain, for your own needs and objectives as well as for emergencies.

What is considered a surplus and how much are you happy to lose access to in the short, medium or long run?

2. Create your investment plan

When formulating your plan, you need to look at three factors: objectives, timescale and budget.

  • Determine what your objectives and priorities are for your children/grandchildren.
  • Define the period of time you are creating this plan for.
  • Set your budget.

Are you targeting a predetermined level of capital at a specific age, or simply providing funds to help them buy their first car, pay for higher education or their wedding?

Are you looking to move assets from your estate for Inheritance Tax purposes? When will the money in your plan need to be available to your children and grandchildren?

These are the sort of questions that will need to be asked and, once your objectives, timescale and budget have been established, you can start to consider investment options and the level of risk, if any, you wish to take.

3. Manage your investment risk

Different types of assets tend to perform well in different market conditions. By broadening your plan’s exposure across a range of asset classes, the fluctuations caused by common economic events can be smoothed out. Assets are, broadly speaking, shares, property, bonds and cash.

From an investment perspective, should your plan cover a short time horizon, it is best to only take a small level of risk in order to reduce exposure to potential losses.

Conversely, should your plan cover a medium to longer-time horizon, taking on more risk could drive up growth potential.

4. Be tax efficient

Applying tax efficiency to your plan may also help to drive up returns and a sensible starting point may be to consider ISAs, such as the Junior ISA, with its generous allowance of £9,000 per child (aged under 18).

For children or grandchildren aged between 18-40 who are considering purchasing their first home or looking to provide an additional source of wealth in retirement, the Lifetime ISA potentially offers a good solution.

Although it comes with a strong withdrawal penalty if not used for a first home or for retirement purposes, one of its key benefits is the 25% government bonus (up to a maximum of £1,000) added to each contribution with a maximum investment of £4,000 per tax year.

If the thought of your children or grandchildren being able to access these funds freely does not appeal to you, then the use of your own ISA allowance could prove invaluable if you were to earmark the funds for them instead.

It allows you to control when and how much money is paid over to them.

Alternative tax-advantaged options include Premium Bonds. While they promise no guaranteed return, they do offer a secure and safe option. However, the effective interest rate is less than 1% a year in the form of prizes which make it in effect no better than a bank savings account though you could potentially be the winner of the £1m jackpot announced each month.

Pensions are also potentially a very good long-term investment option, with tax relief available on any contribution on behalf of your children or grandchildren as soon as they are born.

For those in a position to make larger payments, the use of trusts offers an opportunity to both move funds outside of your estate and oversee how these funds are to be dispersed. You gift the money away but you and your fellow trustees can control the money on behalf of your beneficiaries.

Similarly, an annual gift of up to £3,000 known as the annual gift exemption or regular gifts from normal expenditure out of income may serve to benefit all parties, with the recipient profiting through increased wealth and the donor profiting through the reduction of their estate for Inheritance Tax purposes.

5. Review

Reviewing your plan on a regular basis will allow you to check whether you are on track to achieve your objectives or if further planning is needed.

Given the uncertain and often volatile time we have had during the past 18 months, financial aspirations and long-term goals may have altered without it registering.

Regularly reviewing your investment strategy allows you to amend the risk levels as well as contribution levels as your objectives come closer to realisation.

6. Seek financial advice

Finally, the value of paying for financial advice should not be underestimated.

A study conducted by the International Longevity Centre and supported by Royal London concluded that in comparison to those who took no advice, individuals who did so between 2001 and 2006 benefited from an average increase in the value of their assets by some £48,000 after 10 years.

Engaging with a financial planner may prove to be the shrewdest move in planning for your children’s and grandchildren’s future*. You know it makes sense.

*The contents of this blog are for information purposes only and do not constitute individual advice. All information contained in this article is based on my personal views and opinions.

The value of your investments and the income from them can go down as well as up.

Tax planning is not regulated by the Financial Conduct Authority.