The future of wealth transfers

Money changing hands between British family members sat at an all-time high of £69bn last year, according to research at the time, and the sums were only set to increase by multiples from there. 

UK-wide inheritance payments and gift transfers were on track to more than double to £115bn by 2027. Between now and 2055, an enormous £5.5tn was expected to change hands.

The reason was simple.

Until Covid-19 hit, Brits had been getting richer for years. In fact, UK wealth reached more than £10tn in 2016, almost quadrupling since 1995.

Two contributing factors here were increasing property values and the cashing in of lucrative defined benefit pension schemes. But perhaps the most critical driver was the unprecedented and all-encompassing 11-year post-global financial crisis bull market.

Key points

• Money is being passed between generations at an alarming rate
• People looking to transfer wealth will have less money now than before Covid-19 struck
• Investors are better off putting money into multi-asset funds, than trying to pick cheap stocks

In this environment, it would be unusual for wealth invested in savings portfolios and pension pots left untouched for long periods not to increase in value. Unfortunately, this all changed in March 2020 when the coronavirus pandemic hit.

In the face of lockdown, relentless economic uncertainty, and greatly reduced visibility, the long-feared market correction arrived in full force.

This was not a crisis unique to the FTSE, either – indices around the world were shattered. Fixed income, equity and property investments were turned on their head, and hard-earned investment portfolios across Britain were decimated in a matter of weeks, and the turmoil continues. 

This poses a catch-22 situation for transferring wealth in the UK.

Catch-22

On the one hand, retirees looking to transfer wealth to their offspring are likely to be less wealthy now than they were pre-lockdown.

Research from Moneyfacts estimates nine in 10 Brits saving for their retirement suffered heavy losses in Q1 2020. As such, the record figures quoted at the start of this article would probably be revised down if calculated today.

On the other hand, younger generations are now more reliant than ever on inheritance and gift transfers because of widespread job losses and the likelihood of a long-lasting recession.

Naturally, families are now looking at how to ensure as much wealth as possible can still be transferred despite Covid-19.

The US election and the second lockdown have had varied effects on markets and created much uncertainty

On the face of it, a logical solution for many may be to put more risk on the table.

As we saw in 2008-09, when markets are on their knees, there are many opportunities to generate huge returns in a subsequent recovery rally. However, the problem today is that recovery is by no means guaranteed over the short-term.

The US election and the second lockdown have had varied effects on markets and created much uncertainty. Couple this with the added uncertainty Brexit poses to the UK economy, and ‘cheap’ assets could very well prove to be enormous value traps rather than a means of recovering lost wealth.

These are, of course, not the only hurdles faced by stock markets. Over the longer term, there are also wider considerations: to what extent will technology disrupt the current economic and political order, for example? What role will geopolitical concerns play from here?

Significant drawdowns can, of course, have a huge impact on long-term returns. The greater the amount lost, the higher the gain required to break even. 

In other words, even relatively short-term losses can have a lasting impact on long-term returns.

While a 10 per cent loss in any one year would require an 11 per cent gain to break even, a 30 per cent loss requires a rise of 43 per cent to break even. That is a conversation not many want to have with their clients. 

Add in the fact that losses suffered by retirees making regular income drawdowns are often amplified by the nasty effects of pound-cost ravaging and ascending the risk scale starts to look like a rather dicey strategy.

Possible solutions

We believe it is much more prudent to shift the focus away from recovering what has been lost as quickly as possible, onto the avoidance of permanent capital loss along with steady returns with low volatility.

Multi-asset funds can provide an excellent solution here by aiming to preserve as much of a portfolio’s value as possible throughout the entire market cycle, while also offering a consistent, modest income to replenish any regular drawdowns.

Many invest in near-cash or cash-plus instruments and while this obviously means they do not participate in all the upside on offer when equities are rallying, and fixed income assets are booming, it also means savers are not left holding the bag when the market crashes like it has this year.

Rather, they stand a much better chance of maintaining some form of equilibrium while everything else is falling.

Some way down the line, when things are clearer, risk assets like equities will again offer a great opportunity for savers to recover the losses caused by Covid-19 and pass down as much wealth as possible.

But the bottom line, for now, is that a multi-asset approach centred on capital preservation and smooth, less volatile returns provides unrivalled portfolio insulation in a time of unprecedented uncertainty.

With intergenerational wealth transfers reaching record levels and becoming an increasingly important lifeline for beneficiaries, this cautious approach could prove critical.

Sam Liddle is a director at Church House Investment Management