The latest data by the Office for National Statistics, published on October 30, reveals the wealth gap between generations in the UK continues to widen. The findings highlight larger inheritances becoming more likely as individuals grow older, peaking at age 55 to 64 years.
Unsurprisingly, this demographic also receives the highest transfers in value on average – assets that end up representing only a small part of their overall wealth.
On the other hand, the least wealthy and youngest individuals receive smaller inheritances on average, but these make up a much larger proportion of their total wealth.
However, the age distribution of those receiving an inheritance varies from those receiving a cash gift or loan, which was most common among younger people.
Knowing how clients save and send money, and understanding the impact of transfers between generations on wealth inequality in the UK, is a crucial first step to helping clients reach their financial objectives.
Key trends
In its annual Wealth and Assets Survey, conducted between July 2014 to June 2016, the ONS looked at how receipts of inheritance varied across age, income and wealth distribution.
It found some 3 per cent of those in the lowest income group received an inheritance of £1,000 or more at some point in the past two years, compared with 6 per cent in the highest income group.
This compared with just 1 per cent of those in the lowest wealth division receiving an inheritance of the value of £1,000 or more, compared with 7 per cent in the highest wealth division.
Key Points
- ONS figures show how inheritances become more likely as individuals grow older
- Planning intergenerational wealth should start early
- Many younger people are relying on inheritances to solve their financial problems
People aged 55 to 64 years had the highest average value of inheritances over the value of £1,000, with a median of £33,000 among those receiving them.
This compared with £4,000 for those aged 16 to 24 years and £5,000 for those aged 25 to 34 years.
However, the age distribution of those receiving an inheritance also varied from those receiving a cash gift or loan, most commonly received among those aged 25 to 34 – among whom 11 per cent had received a gift or loan above £500 in the past two years.
According to Jason Witcombe, chartered financial planner at Progeny Wealth, the findings come as no surprise.
He says: “It is not necessarily the way to create a stable, happy society but it is not surprising that, on average, those people with wealthy parents will probably end up wealthy themselves.
“For those families who wish to think in an intergenerational way, the key is to start early and do this on a gradual and structured basis rather than leaving it until your 80s and expecting to be able to come up with a last-minute quick fix.”
Protecting wealth transfers
Making it easier to pass on wealth from one generation to the next – while parents and grandparents are still alive – could be one way to tackle the growing financial divide between generations.
Sarah Phillips, inheritance tax expert at Irwin Mitchell Private Wealth, believes that increasing amounts of gifts and loans, as older generations accumulate more wealth, will need increased legal protection.
She says: “Many think that transferring money between families is without risk, but with loans in particular if there is not a proper schedule and legal protection in place, then parents or grandparents can find themselves out of thousands of pounds.
“It is always worth seeking a solicitor’s advice if you plan to lend a large sum of money over a period of several years, in case one of the parties’ circumstances change or if the relationship goes sour.”
Indeed, Ms Phillips says it is important that cash gifts, and loans, be undertaken in the right way – particularly when the amount is high.
“Many parents and grandparents find themselves in the position of wanting to help their child or grandchild out with a deposit for a house, contributing to the expense of a wedding or helping with their children and future heirs.
“If older generations do not want to gift their children or grandchildren money outright because of concerns over a partner or other reasons, they can put the funds into trusts or loan notes to protect assets for the long-term benefit of the recipient and any children they may have.”
According to Progeny Wealth’s Mr Witcombe, inheritance tax “is an extremely punitive and unpopular tax” and “people would rather give their hard-earned money to their families or to charitable causes rather than to the government”.
Indeed, Rachael Griffin, tax and financial planning expert at Quilter, believes as the age people can expect to inherit is edging into mid-60s, while those aged 25 to 34 are most likely to get gifts or loans from family – consistent with the rise of the bank of mum and dad – the current IHT policy that encourages wealth to be transferred on death needs a rethink.
She says: “The reliance on inheritance to improve the lives of those that receive it is revealed in the latest ONS figures, which show inheritances received by those in the lowest wealth quintile made up 44 per cent of their net total wealth.”
She added: “However, the average age at which people can get assistance from their older loved ones is getting later and later as government policy encourages people to pass on wealth on death.”
According to Ms Griffin, the annual IHT gifting allowance – which has been frozen since 1981 – “is living in the past”.
“Had the annual allowance tracked inflation, it would be permissible to gift £10,932.20 per tax year in 2017, according to the Bank of England inflation tracker,” she says.
Conversations about wealth
Carl Drummond, senior wealth planner at Sanlam UK, says conversations around transfers of wealth between generations are becoming increasingly necessary – especially as 25 to 45-year-olds are expecting to receive more than £1.2trn in the next 30 years.
While it is often not an easy conversation for clients to have, he says encouraging them to broach the topic and seek financial advice sooner would help many families get peace of mind, and be better prepared for the future.
He says: “Many younger people are relying on inheritances to pay off debts or avoid saving for later life and if their expectations exceed the windfall they receive, they are at risk of making unrealistic long-term financial decisions.”
He suggests clients should first and foremost be encouraged to gain a good idea of their financial position, and work out how much they are likely to leave behind, as well as consider how they would fund possible care expenses.
“It sounds simple enough, but our study, ‘The Generation Games’, has shown that potential beneficiaries don’t always realise they will be sharing their inheritance with others, such as grandchildren, charities or friends,” he continues.
“While this may result in a difficult conversation, at least you will be helping your beneficiaries be more realistic about their financial future. Nasty surprises and false expectations can lead to difficulties further down the line.”
Victoria Ticha is features writer at Financial Adviser
