How young people need to prepare for the great wealth transfer

We are currently on the verge of the biggest generational wealth transfer in history, with the combination of rising living costs and stagnating wages meaning that many millennials are relying on substantial gifts or inheritances from older relatives to achieve their financial goals.

According to a recent survey conducted by wealth management company Sanlam, nearly two thirds of 25- to 45-year-olds now expect to receive some sort of an inheritance, with almost a third expecting to receive at least £50,000 in either fixed assets or money.

This expectation takes on particular importance given that a large proportion of younger people have very little financial stability of their own. Forty percent of those surveyed by Sanlam had less than £10,000 in savings, with many seeing a potential inheritance as a financial panacea.

However, advisers sometimes find that many younger clients have unrealistic expectations of how much they will end up inheriting and forget to take into account the impact of both inheritance tax and the amount of money that long-term eldercare will have drained from their parents’ life savings.

‘I’ll say to clients that “you shouldn’t let inheritance be your sole motivator in terms of your financial planning, because you’ll be in for a nasty surprise”,’ Plutus Wealth Management’s Sebastian Hurst says. ‘I think people on the whole are slightly naive regarding the effects of inheritance tax. It’s a very hefty tax that you’ve got to pay, 40% for inheritances over £650,000. I know that the government has recently introduced the residency nil-rate band, but that’s tapered away for estates over £2 million.’

A common problem is that many young people have little understanding of personal finance and risk, due to a lack of education on the subject, either from school or their own families. As a result, those who receive inheritance or gifts are in great need of expert advice.

As well as covering the basics, such as organising a will, pension planning and considering investing some money into an ISA, Simon Bullock at Mulberry Bow believes that it’s important to begin by having a big-picture conversation about their clients’ financial views and goals.

‘The first step is to ask, “what do you want money to do for you?”’ Bullock says. ‘And even before you get into the specific goals, such as buying a house, getting them to just think about what they feel is important regarding money, because whether that’s attitudes towards tax, attitudes towards sustainable and ethical investing — that’s different for everybody.”

In addition, Bullock points out that it’s crucial for advisers to address the issue of risk at an early stage, a concept many younger clients have misconceptions about.

‘Risk is one of the most dangerous conversations that advisers have with clients, because it can be very easily misunderstood,’ he says.

‘Most advisers are talking about short-term ups and downs in asset prices, but that’s not necessarily what the client has in mind. They often think that traditional investing in stock and bond markets is like a casino, and ironically, a lot of that’s about fear of the unknown. And they’ll then invest in a friend’s business, which might have a very high chance of complete failure and capital loss.

‘A lot of that is because our industry is not very good at communicating what investing is all about, and how fundamentally it is about backing businesses, but backing much larger and more established businesses than your friend’s start-up.’

According to Sanlam, while four in five advisers see the coming intergenerational wealth transfer as the greatest opportunity for the industry, a quarter remain concerned about their ability to attract younger clients.

A large part of this generational client gap is due to a lack of knowledge among young people about the importance of investing.

‘If you’re going to sit on cash for too long, you’re actually losing money, because inflation is eroding the value of that cash,’ Plutus Wealth Management’s Hurst says. ‘So investing is your best chance to make any positive real return, and a benefit of investing via a financial planner is he’ll often guide you through the myriad of different tax wrappers that there are.’

However, Hurst emphasises that for young people who have just received a substantial inheritance or gift, it’s also important not to rush too quickly into binding agreements, without first weighing up their options.

‘You’ve got to really carefully decide what you want to do,’ he says. ‘If that means sitting on cash for a year or so, then so be it. You don’t want to get locked into something when it’s not actually going to fulfil any of your financial goals.’