6 minute read
The great wealth transfer
by Wardour
Julia Griffiths Jones
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In the next decade, £327 billion will be left to millennials by their wealthy baby-boomer parents, but what should they do with the money? Jill Insley finds out
Millennials are about to become the beneficiaries of the biggest wealth transfer in history as their baby boomer-parents and grandparents leave them inheritances.
Baby boomers – those born between 1946 and 1964 – have lived at just the right time to benefit from soaring property prices, inheritances and final salary pension schemes. As a result, they are estimated to control around 80% of private wealth in the UK1, and one in five of over-65s is a millionaire.2
This wealth is set to be transferred to the following generations as inheritances or gifts during the next 30 years: in the next decade alone £327 billion is expected to be passed on to 300,000 younger people in the UK.3 The amounts involved are so enormous the process has even been given its own name – the Great Wealth Transfer.
This begs the question of what the recipients, many of them millennials born between 1980 and 1996, should do with their inheritance windfalls.
Initial steps
Harry Finster, Portfolio Manager for Sanlam – and at the age of 28 a millennial himself – says that the first step should be making sure that the inheritance is stored safely to give time to decide about longer-term requirements. “The Financial Services Compensation Scheme protects up to £85,000 deposited with each institution that holds a banking licence,” he says. “So, if you have inherited £500,000, you should look to spread that money between accounts with six different banks to ensure the entire inheritance is protected.4”
Some of that money should be kept permanently in an easy-to-access cash account for emergencies. “We would normally recommend an amount equivalent to six months’ expenditure to be held in a ‘safety net’ account,” says Finster. “If you are a high earner you might not need to hold quite so much – the aim is for you to be able to meet normal expenses without disrupting your longer-term investments.”
Cash savings accounts should not be considered a long-term solution for the remainder of an inheritance unless the beneficiary is very risk averse. The interest paid on savings accounts currently is easily outstripped by inflation, meaning that the purchasing power of cash savings will gradually diminish over time.
How the remaining inheritance is distributed depends on many factors, including how much money there is, the beneficiary’s appetite for risk and their individual circumstances. One of the first steps a Sanlam adviser will take is to carry out a risk tolerance assessment. “All investments involve risk,” says Finster. “It’s important to make sure you are comfortable with how your money is invested and understand the potential volatility investments will experience over your investable time horizon.”
As debt invariably costs more than the interest paid on cash savings, the most obvious action is to pay off any loans and credit cards. “Paying off debt provides you with a solid foundation for your finances,” says Finster. “It means that none of your income, including investment gains, will go towards servicing interest payments and more can go towards growing your net worth.”
Investing in property
An inheritance can also be used to eradicate another major expense – rent. Fewer millennials are renting now than four years ago, currently accounting for 42% of all rent paid in Great Britain compared to 55% in 2016. But research by the estate agency Hamptons indicates that they are still paying £24 billion in rent annually.5
Even if there is just enough to provide a deposit for a property, paying a mortgage can prove cheaper than rent.6 Research by the Halifax found that, in December 2020, it was 9% more expensive to rent, with an annual difference of £816.
Also, as you are buying your own property, you, rather than your landlord, are benefitting from the monthly payments. “We are expecting interest rates to start rising in the next 12 months. If you can get a
three- or five-year fixed rate mortgage, you will still be in a very strong position to save in the long run versus paying rent,” says Finster.
Depending on how big the inheritance is, the beneficiary might want to invest in buy-to-let property as part of a diversified investment portfolio. According to the Office for National Statistics, UK property prices have risen by 175% in the past 20 years, from £81,628 to £224,337.7 However it’s important to remember that property prices can fall, property can be timeconsuming to sell, and buy-to-let can be hard work.
Stock market
Millennials have one huge advantage over older investors – time. Finster says: “How you invest depends entirely on what you want to use the money for and when you will need to draw on the assets.” If you are likely to need the money within the next five years, then equity markets may prove too volatile to ensure safe receipt of your initial investment. If you have a longerterm horizon, time will help mitigate short-term market volatility and you can afford to take more risk.
Finster says that ensuring the suitability of the investment portfolio is paramount to his work as an investment professional: “Usually we build clients a bespoke, risk-adjusted portfolio that looks to reach their growth or income objectives by investing in a blend of equities, bonds and other asset classes.”
Having that extra time also means millennials can benefit from ‘compounding’, which is the reinvestment of interest or capital growth to generate additional earnings. Done correctly, investors can benefit from exponential returns. Finster recommends maximising use of tax-efficient wrappers such as ISAs and pensions to protect investors from capital gains and income tax, using annual allowances to gradually move money from a taxable portfolio of assets into a tax-free environment.
Further tax efficiencies to be considered later in life include the reduction of inheritance tax by asset sharing with spouses or gifting to individuals and trust structures.
Many of the millennials inheriting windfalls will also plan to pass wealth on to their children and grandchildren. It is a good idea to seek professional advice early on to understand how best to use, preserve and grow this additional wealth, be it through careful investment, the purchase of life insurance, wills and inheritance tax planning and/or the setting up of trusts.
Finster says that, for younger millennials, some of the actions will seem premature or unnecessary. “Some things, such as paying off debts or taking out life insurance policies offer huge advantages, have few downsides and should be done as soon as possible,” he says. “The benefit of other steps, like contributing to pensions, may not become apparent until later on in life. But creating a plan for your wealth could help to protect you and your family for generations to come.” n
Sources 1 FTAdviser, 27 April 2021 2 FT, 9 January 2019 3 FTAdviser, 26 September 2019 4 FSCS, 5 November 2021 5 Property Industry Eye, 13 September 2021 6 Money Advice Service, 15 September 2021 7 The Times, 23 August 2021
Find out more
To learn more about passing down or managing an inheritance, visit www.sanlam.co.uk
Sanlam has offices across the UK. To find your nearest Sanlam office, simply visit www.sanlam.co.uk/contact-us
You can also call us on 0333 015 5600
or email getintouch@sanlam.co.uk
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Sanlam UK @SanlamUK www.sanlam.co.uk/wealthsmiths
Sanlam is a trading name of Sanlam Private Investments (UK) Limited, registered in England and Wales 2041819 and Sanlam Wealth Planning UK Limited, registered in England and Wales 03879955, which are both authorised and regulated by the Financial Conduct Authority, Registered Offices: Monument Place, 24 Monument Street, London EC3R 8AJ.
