Approximately £1trn is set to be passed on through inheritances in the next decade – an almost unimaginable amount of money that is creating an inheritance economy many IFAs are unprepared for.
Rising wealth and higher mortality rates mean the amount of money going from one generation to the next is set to increase substantially, from the current level of £69bn a year to £115bn a year by 2027, according to research from the Centre for Economics and Business Research. That is a 66 per cent increase in the amount of wealth passing through families. If advisers are only dealing with one generation in the family, the chances are they will miss out on continuing to manage that money going forwards.
Much of the rise in inherited wealth is being driven by the increase in housing prices. We already know that over the past 20 years house prices have risen by 273 per cent according to the Nationwide House Price Index, an average annual growth of 7.2 per cent. Britain is renowned as one of the most property-mad countries in the world and that is unlikely to change. But, for the younger generation, buying a home is becoming increasingly difficult.
Young tenants – those aged 18-39 – are spending a third or more of their take-home pay on rent, with those trying to rent alone giving as much as two thirds of their money to their landlord according to buy-to-let specialist Landbay. Hardly surprising then that Legal & General’s recent research showed the bank of mum and dad is financing 26 per cent of all mortgages in the UK this year. Parents will be involved in providing deposits for 298,000 homes across the UK, putting them on a par with the ninth biggest mortgage lender in the UK.
Since the millennials are so strapped for cash, advisers see little point in courting them as clients. But this is a big mistake, because it will be these clients who will inherit their parents’ wealth. If the relationship has not been developed with them by this stage, then most IFAs stand little chance of helping them manage their legacy when the time comes.
The average inheritance between 2012 and 2014 rose from £43,000 to £54,000, suggesting that large amounts of money are already passing to the younger generation and they will need help to use that money in the best ways possible.
When you consider that by 2047 there is set to be as much as £335bn a year passing to the next generation, these are numbers that cannot be ignored by advisers who are serious about maintaining and growing their business.
Planning ahead is a key part of the strategy when talking to existing clients, asking them how they intend to cascade their wealth to the next generation and what they hope their children will do with that money. Parents are increasingly keen to keep control over their cash even after they have died, according to research from Prudential, with a quarter wanting to stop family money being lost if a child divorces and to control how the amount they bequeath to their children is spent.
Some 30 per cent of those surveyed by Prudential also want to ensure their money is not squandered by their children. The same number also want their grandchildren to benefit from that money. One in 10 even want to stipulate that their children take financial advice when they get the cash – great news for advisers, but how can you be sure that you are the adviser they choose?
The typical inheritance tax bill for the UK is £175,000 according to Prudential. Some sensible planning can reduce that to nil if the correct legal procedures are put in place early enough.
Since estate administration stopped being a legal service, it is no longer necessary for a solicitor to deal with an estate, yet there is still the misconception that you need to use a solicitor. This is not the case, and it means that estate administration is starting to become a financial service rather than a legal one.
For advisers who want to ensure their clients are dealt with in the best way, there are now estate administration services they can partner with that will keep the client within their own firm for estate administration, rather than passing them on.
This helps advisers not only offer peace of mind for their clients in knowing what will happen after they have passed away, but also to provide the best service to their surviving relatives. Estate administrators deal with everything from applying for probate to dealing with utility companies and rehoming pets left behind.
But, more importantly, offering this service in-house means advisers can have the conversations with the family about how the estate will be dealt with at a much earlier stage, giving them the chance to meet the children who will inherit and build that relationship much sooner.
After all, when someone dies, there is much more than just money that needs to be dealt with. A trusted adviser with the right tools within his or her business will be perfectly placed to help at what is likely to be one of the most difficult times in the lives of the bereaved.
Christopher Jones is sales and marketing director at Kings Court Trust
Key points
Rising wealth and higher mortality rates mean the amount of money passing from one generation to the next is set to increase substantially.
The average inheritance between 2012 and 2014 rose from £43,000 to £54,000.
The typical inheritance tax bill for the UK is £175,000.
