Intergenerational wealth: What and why

What is intergenerational wealth? And why is everyone talking about it? Here we outline the drivers behind the £5.5 trillion expected to move hands over the next few years. 

Intergenerational wealth - An introduction

A huge sum of wealth is acquired by beneficiaries every single year – whether in the form of inheritance after death, or via gift transfers. However, over the last few years, headlines about ‘the inheritance economy’ and ‘the big intergenerational wealth shift’ have appeared just about everywhere. This is the result of a number of firms who have released research about exactly how much money is expected to be passed on over the upcoming three decades.1 And, it’s a lot more than we’re used to.

All reports have reached the same conclusion: we are on the brink of a vast shift in assets, unlike any that we have seen before. By 2027, it is expected that wealth transfers will nearly double from the current level of £69 billion, to £115 billion.2 Coined as ‘the Great Wealth Transfer’ of the 21st century (GWT), it is expected to bring about a total overhaul to the way that current financial advice practices work. Is your practice ready?

Drivers behind the Great Wealth Transfer

£5.5 trillion between now and 2055 

According to the King’s Court Trust, £5.5 trillion will move hands in the United Kingdom between now and 2055, with this move set to peak in 2035.3 Why? Well, there are a number of contributory factors that account for this. The two main reasons are increased net worth and rising mortality rates.

Increased net worth: property, equity markets and DB transfers

In 2016, the UK’s wealth reached over £10 trillion, almost quadrupling since 1995.4 A huge proportion of this increase has been down to the rise in property prices we’ve experienced in the last two decades. Average house prices rose by a massive 273% between 1996-2016 (see chart 1).

This works out at an average annual growth rate of 7.2% - exceeding general inflation and earnings growth. The beneficiaries? Baby boomers (i.e. those now aged between 53 and 72), who were able to get on the property ladder in the 1980s, and stay on it ever since. Indeed, the Office for National Statistics claim that it is the greatest contributor to the change in UK net worth that we have ever seen.5 Thanks to this capital growth, property is expected to account for over 70% of the wealth transferred over the coming years.

Intergenerational wealth chart 1- House Prices

Booming equity markets are another contributory factor to the UK’s net worth. Capegemini’s 2017 World Wealth Report indicates that a growing number of individuals have hugely increased their asset bank thanks to the ongoing equity rally we have experienced over the last few years. This is particularly prevalent for High Net Worth Individuals who saw a massive 24.3% return on their portfolios, globally.6

Furthermore, thanks to low interest rates and quantitative easing, fixed-term final salary pensions have soared in value, adding to the UK’s net worth. Meanwhile, pension freedoms around Defined Benefit transfers have led to more and more people checking out of their final salary scheme and cashing in. And, as transfer rates have improved, the number of Brits making the most of 2015’s pensions freedoms have increased. In total, according to the HMRC, £16 billion has been withdrawn. However, the Office for Budget Responsibility recently revised down their previous drawdown estimation figures, showing that the rate of transfers is indeed slowing.7

Increased life expectancy

Like their net worth, the life expectancy of baby boomers has also increased. Thanks to a greater awareness of healthy living practices, medical advancements and improved assisted-living facilities, our elderly are living longer. Life expectancy in the UK at age 65 has significantly grown since 1984 – from 13.0 to 18.0 years for males and from 16.9 to 20.7 years for females (see chart 2).

Intergenerational wealth chart 2 - Life expectancy

Living longer means that our elderly community are holding onto their assets for longer – and reaping the rewards.

However, experts in this field anticipate that the UK’s aging population is due to reach a peak of sorts, and that we will see a rising number of deaths over the next three decades. The annual number of deaths in the UK alone is expected to rise to 764,000 in 2047, up 75% from 2013.8 And, given that 55% of the UK intending to transfer wealth upon death, it is likely that we will see inheritance shift en masse.9

360° of financial advice

Tackling intergenerational wealth from all angles

At Russell Investments, we know that just around the corner, the Great Wealth Transfer will bring about great change. Next time, we will outline the risks and considerations for financial advisers, as well as the opportunities.

Over the coming months, we will be discussing the numerous way that financial advisers – big and small – can prepare. So, watch this space for insight into how intergenerational wealth may affect the following:

- Your practice and your bottom line
- The ‘Sandwich Generation’
- ‘Vulnerable clients’
- ‘Millennials’

As a starter for ten, we provide tools and insights to help plan, build and expand your business against the changing market backdrop. For this topic in particular, we provide courses that help you to prepare for for the increase in vulnerable clients and to develop an investment plan suitable for the sandwich generation, inclusive of families and youngsters.

Footnotes

1 Royal Bank of Canada, 2017; The Kings Court Trust, 2017; Accenture, 2016.

2 Kings Court trust, ‘Passing on the Pounds – The rise of the UK’s inheritance economy’. 2017, p. 3

3 Resolution Foundation, Intergenerational Commission. ‘The Million dollar be-question’. 2017, p. 4.

4Lloyds Banking Group, 2017.

5 The Office for National Statistics, ‘The UK national balance sheet: 2017 estimates’. 2017.

6 CapeGemini, ‘World Wealth Report 2017’, p.13.

7 Office for Budget Responsibility, November 2017, p.120.

8 Kings Court trust, ‘Passing on the Pounds – The rise of the UK’s inheritance economy’. 2017, p. 9.

9 Royal Bank of Canada, ‘Wealth Transfer Report 2017’. 2017, p. 16.

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