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Are you ready for ‘The Great Wealth Transfer’?

27 May 2021

4 minute read

Over the next twenty to thirty years, a record £5.5 trillion is set to be transferred between the generations as either inheritance or gifts1. In this article, we discuss ways to make this transfer of wealth smoother, and ways to include beneficiaries in conversations to educate and prepare the next generation of investors.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • What is ‘The Great Wealth Transfer’.
  • How to make the transfer of wealth smoother.
  • What does this transfer of wealth mean for investing.

In the UK, over 80% of household wealth is held by the over-45s, and over the next 30 years, this is set to be transferred between generations as inheritance or gifts (according to the Office for National Statistics). This poses a question around how well the younger generation of beneficiaries are prepared for, and indeed educated about, the large sums of money that they may one day inherit. This has been dubbed as ‘The Great Wealth Transfer’.

Various studies have been conducted concerning the amount of wealth involved, with estimates of £5.5 trillion globally over the next thirty years1, and £327 billion in the next decade alone to 300,000 younger people in the UK2. This unprecedented amount of wealth is set to be passed on from ‘baby boomers’ (the generation of individuals born between the late 1940s and early 1960s) to ‘millennials’ (those born in the 1980s and 1990s).

Wealth advisors have a responsibility to ensure that this wealth transfer is done in a gradual, educated, and efficient manner. Otherwise, we risk beneficiaries becoming ‘lottery winners’, suddenly having access to a large amount of money, and not knowing what to do with it. Conversations between holders of wealth and their beneficiaries about inheritance will improve preparations and make the transfer of wealth smoother.

Why has this happened?

In the UK, the baby boomer generation currently has more wealth than any previous generation; the majority of this wealth is held up in property and pensions.

Average UK house prices reached a record high of £250,000 in December 2020, a growth of 48% over the last decade3. This is due to a number of contributing factors, such as Bank of England interest rates reaching an all-time low in 2020 and reduced rates of Stamp Duty in 2020/21.

In addition, pension reforms have allowed greater access to enable investors to manage their savings for retirement. This perfect storm of interest rates, property and pension reforms has meant that the next generation of beneficiaries are set to inherit more overall wealth than any generation before them.

What does this mean for investing?

Research has shown that there is a gap in the investment knowledge and experience of potential beneficiaries. With an ever-growing and complex universe of investments, many young beneficiaries may feel like they don’t know how or where to start investing. A study by the CFA Institute found that nearly 4 in 10 millennials cite lack of knowledge as a major hurdle to investing4, among other barriers such as not enough savings or income, and a focus on paying off debt instead. Furthermore, many young people may have negative connotations of investing, given that they were likely at an impressionable age during the 2008 financial crisis.

It’s important that there is a mutual understanding of each other’s financial goals, investment preferences, and risk tolerances, as these are likely to differ between the generations. For example, the older generation (or the baby boomers) are more likely to have goals such as preserving wealth, or passing wealth along to future generations, compared to beneficiaries (or millennials), who are much more likely to have goals such as debt repayment, travel, and building a pension. Millennials are also more likely to invest with sustainability or a wider societal benefit in mind, such as ESG (Environmental, Social, and Governance) investing5. Millennials in the UK are more interested in impact investing (defined as an investment strategy that aims to generate a specific benefit to society or the environment, as well as financial gains) than any other generation, with 64% of millennials expressing an interest, whereas only 50% of generation X (the generation in-between baby boomers and millennials) and 34% of baby boomers express a similar interest6

Another trend among the younger generation is the desire for immediate, accessible, digital investment advice platforms such as robo-advice. Robo-advice describes a digital, automated investment service, whereby the customer will be asked a number of questions to determine their investment goals and how much risk and reward they are prepared to take to achieve those goals, and they are then assigned an appropriate strategy accordingly..

How can I ensure there is a smooth transfer of wealth to my beneficiaries?

Family relationships are rarely straightforward; simply handing money to children before they are ready is fraught with potential dangers, and getting beneficiaries to appreciate family wealth and their inheritance has its own difficulties. Furthermore, inheritance tax planning is complex and requires support and advice. While no two families or estates are the same, there are ways to take positive action to share wealth between the generations – this is not an action you take once, but a considered journey to smooth and ease the process of inheritance.

It’s normally advisable to start planning for the future as soon as is feasible to ensure that beneficiaries are well prepared and supported through their various life stages. Including the family in wealth advisor discussions can help demystify investing, and enable long-term, consistent plans for inheritance to be put in place from an early stage. As Anthony Ward, Head of Barclays Wealth Planning states, “the most powerful client meetings are with the beneficiaries included.”

One way to engage the next generation is to frame investment conversations around the causes they care about, for example around ESG or impact investing. If beneficiaries can see a wider societal or environmental benefit to their investment choices, as well as returns, they may be incentivised to remain engaged, and seek to take an active role in understanding their inheritance. Consideration of beneficiaries’ investment preferences and risk tolerances can also help to ease the transfer. If the younger generation feel that the portfolio of assets is well-suited to their goals, needs and preferences, they will feel more at ease upon inheriting the portfolio, and are more likely to remain invested.

When considering the tax implications of an inheritance, most people don't realise how much tax may be payable upon their death and so often fail to plan adequately for it. However, with careful planning, the amount of inheritance tax (IHT) payable on death can be reduced. Individuals can choose savings and investment options that are accessible and under their control, but free from IHT. This can mean that the estate that the next generation inherits does not face an unnecessarily large tax bill.

In summary, passing wealth to the next generation can be hugely beneficial, but it’s best if it’s done carefully. Prudent planning, flexibility and sound advice are key.

Where to invest

To diversify your investment, you may like to consider our own Barclays Ready-made Investments (RMI). The RMI are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest in passive funds across a range of asset classes and regions, offering a globally diversified one-stop solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ. Past performance of the fund and its manager are not a reliable indicator of their future performance.

We don’t offer personal investment advice so if you’re unsure you should seek that independently.

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

Plan & Invest is a new service which creates and manages a personalised Investment Plan just for you. Whether your long-term goal is your child’s university education, retirement or just building a nest egg, all you have to do is tell us a bit about yourself and then, if your application is successful and you’re ready to invest, let our experts select and manage your investments (minimum investment is £5000).

Read the Assessment of Value report [PDF, 683KB] for funds run by Barclays.

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