For those who have not noticed, we are in the midst of a massive intergenerational wealth shift.
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.
- 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.
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.
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.