Thought Leadership: The Rise of the Inheritance Economy

“Unsurprisingly, housing growth has far outpaced inflation and earnings growth over the same period, whilst at the same time pushing further out of reach home ownership for younger generations.”

Written by Daryl Thorpe, Partner at Zenzic Capital for Intelligent Partnership’s 2022 Q1 Update:

The UK economy’s prosperity after WWII, with well-paid jobs, substantial pensions, entrepreneurial prospects, and property ownership for many, has resulted in the wealthiest older generation in history. The over 50s own more than 70% of household wealth. This wealth has grown steadily over the last 25 years, despite economic downturns, with household net worth rising from £2.8 trillion in 1995 to £11.2 trillion in 2020, a four-fold rise.

Unsurprisingly, housing growth has far outpaced inflation and earnings growth over the same period, whilst at the same time pushing further out of reach home ownership for younger generations. The average age of first-time buyers has increased from 26 in 1997 to 33 today, spawning the so-called “Generation Rent”. In turn, increasing rents further limit the ability of younger households to save, making it even more difficult for them to climb onto the housing ladder.

When you couple this with a challenging economic and political landscape, with the financial repercussions of COVID to be felt for decades, global political instability, and the threat of East vs West lingering, financial achievement for many of the younger generation lays with the prospect of a greater inheritance. It is predicted that over the next 30 years £5.5 trillion will pass between generations.

This is the “Inheritance Economy”.
In essence it is an extension of the “Bank of Mum and Dad” which has become the largest ‘lender’ in the UK, particularly to
first-time home buyers. Gifting from the older generation during their lifetime is a large part of intergenerational wealth transfers, providing a helping hand to younger family members while also being a cornerstone of estate tax planning – gifts fall outside of a deceased estate for the purposes of calculating IHT if made at least 7 years prior to death.

So, what are the challenges for financial advisers?
An ageing population, which holds the majority of the UK’s wealth, is set to lead to a rising number of deaths in the coming years. The associated pay-out and reduction of funds under management through large IHT liabilities, and the beneficiaries’ requirement for cash, plainly has the potential to dramatically reduce an adviser’s funds under management, as well as their client base numbers.

However, increasing availability of professional estate planning advice, incorporating the whole family and beneficiaries to enable closer alignment of goals across generations, with a larger probability of generational client retention, offer opportunities to address this.

In addition, seeking to reduce IHT liabilities will help the preservation of a higher estate transfer value. This can be accomplished by using a combination of gifting and tax-efficient investment products, many of which give not just lifetime income but also liquidity and access if needed, as well as the advantage of IHT relief.

The Inheritance Economy is here to stay, and we must all adapt if the financial services industry is to continue managing wealth through the generations.

Link to Original Publication