The great wealth transfer

“Don’t worry Rodney, this time next year we’ll be millionaires!” famously stated Del Boy, and whilst this highly unlikely claim did occur, over the coming years more people than ever are expected to become overnight millionaires.

In the upcoming decades, billions of pounds will be passed down through the generations as the post-World War Two ‘Baby Boomers’ pass on their wealth to ‘Generation Xers’, but why has this become so newsworthy to have been labelled as ‘The Great Wealth Transfer’?

In 1995, the total net worth of UK households was £2.8 trillion but fast forward to 2018 and this increased to a whopping £10.2 trillion! This was, in no small part, due to house prices rising by 273%, making up over half of a household’s net worth (1).  Rising stock markets, low interest rates and quantitative easing have also caused fixed-term final salary pensions to soar in value, while Defined Benefit transfers have allowed people to forfeit their final salary scheme and receive cash value instead.

On top of this, the increase in life expectancy of five years in males over the last 40 years means many senior citizens are reaping the rewards for holding their assets longer.

The transfer of intergenerational wealth can be a complex issue, impacting all family members involved. If managed effectively, it can significantly improve the financial circumstances of the recipients. However, mishandling this process can lead to conflicts and resentment that may have long-lasting effects.

One aspect that hasn’t been widely considered is the impact on other family members, and in particular, children, as their parents think about selling their business or retiring from their career, perhaps selling their family home, and starting life in retirement.

It is important that children are prepared to deal with this process, not least so they are aware of the financial implications and how they may be affected. For instance, children may be expecting to receive a certain amount of money from their parents – particularly those who are selling a business – and end up disappointed. Conversely, they may not be expecting to receive anything, and are therefore not equipped to deal with a windfall.

This is not an easy exercise, as you may not want to discuss your financial affairs with your children. You may find your children’s eyes are opened when they see what their parents have been able to achieve financially. They may even want to know how they can do that for themselves and change their own habits.

With the significant wealth expected to be transferred from one generation to the next, there is a risk that heirs may become overly dependent on their anticipated inheritance. It is crucial to involve younger generations in understanding how to manage the wealth they will eventually inherit, as well as empowering them to make wise decisions about their own financial resources.

It will therefore be key to carefully consider who will inherit what and whether you prefer to pass on your wealth during your lifetime or on death. These decisions then need to be balanced by the tax implications of any proposed planning given that inheritance tax receipts in the UK exceeded £7.5bn from 31,000 estates in the last tax year.  (2)

There is no doubt there is much to consider and we wouldn’t want the next generation to end up broke like Del Boy due to a single ill-advised decision!

For help on deciding when to pass on your wealth and to also prepare the recipients, we recommend attending our Rapid Responsibility and Nearest and Dearest masterclasses. View our latest events and book your place here.

Alternatively, if you have more immediate concerns, please contact your financial planner on 0161 486 2250 who will be glad to help.

Sources

1 -Office for National Statistics

2 – HMRC