The Great Wealth Transfer: at a glance
- What do I need to know? Savers are expected to pass on trillions to younger generations by 2050.
- What does it mean for me? It’s important to consider how you protect and gift money to younger generations to avoid wealth erosion.
- Why does it matter? Gifting wealth to family gives them opportunities to thrive amid financial uncertainty.
Savers are expected to transfer more money than ever before to their families. In the UK, up to £7tn will be passed to younger generations by 2050.
According to research commissioned by Flagstone, two-thirds of parents earning over £75,000 per year plan to save over £15,000 for their children’s future (65%).
65% of parents earning £75,000+ to save more than £15,000 for children
If you’re too focused on building wealth, and not learning how to pass it on efficiently, you could leave your loved ones with less than you intend.
In this guide, you’ll learn about the Great Wealth Transfer. You’ll also discover ways to protect and share your wealth, keeping more of what you’ve saved in the family.
What is the Great Wealth Transfer?
The Great Wealth Transfer is the largest ever movement of money between generations, with Baby Boomers passing on their savings to dependents.
It’s a result of older generations living longer and earning on the value of their properties, investments, and pensions - making it easier to grow their savings.
Modern savers are also driving the Great Wealth Transfer, as they seek out tax-efficient ways to avoid wealth erosion. For example, if you leave someone an inheritance in a will, instead of using tax-efficient gifting, you could pay more in tax depending on your circumstances.
More people than ever are ‘giving while living’ - passing wealth to younger generations earlier to reduce the total tax paid.
Flagstone’s research reveals most parents and guardians plan to gift their savings when their dependents turn 18 (over a third of savers). ‘So, it’s important that any money set aside for children is working as hard as possible’ says Claire Jones, Head of Strategic Relationships and New Business at Flagstone.
‘This could mean shopping around to find accounts paying the highest rate of interest, including Junior ISAs (JISAs), which allow parents to save tax-free for their children until they’re 18.
‘Thanks to compound interest, the longer your savings are in place, the more they will continue to grow.’
How can older generations transfer their wealth?
There are a handful of methods for passing on wealth, each of which comes with its own tax implications. This means families should consider how to structure their financial gifts.
Shop around to find accounts paying the highest rate of interest. Junior ISAs allow parents to save tax-free.
For example, gifting large lump sums in a will could invite more tax compared with passing on wealth earlier. You could also consider gifting money in smaller amounts over a handful of years by consistently using annual allowances.
Here are some examples of tax-efficient wealth transfer strategies:
Giving while living: Gifting money early can mean you pay less Inheritance Tax (IHT). You can gift anyone £3,000 tax-free each year under the ‘annual exemption’. But if you make a transfer over seven years before you pass away, you can gift as much as you like without paying IHT at all. This is known as the ‘seven-year rule’.
Trusts: Trust funds may help reduce the IHT you pay, depending on your personal circumstances. The cash you gift in a trust is taxed at the beneficiary’s rate, not yours. So, if you have a larger income than your loved ones, giving cash through a trust can mean they pay less tax overall. But the rules are complex, so it’s a good idea to consult a qualified financial advisor if you’re interested in opening a trust.
Pensions: Personal and workplace pensions can be transferred to a someone you choose without IHT if you pass away before 75. After 75, HMRC charges tax at the recipient’s income band rate. They can choose to withdraw the funds in a lump sum, as income through pension drawdowns, or as a monthly annuity.
Businesses and property: Gifting businesses or properties as an inheritance can be an effective way to transfer wealth under certain conditions. For example, it may be possible to qualify for Business Relief. Properties also benefit from the seven-year rule.
How can families prepare for the Great Wealth Transfer?
Data from Flagstone’s ‘Bank of Mum and Dad’ survey reveals over a third of parents and guardians intend for their financial gifts to be used as a ‘general cushion’ (34.92%). This means the money is intended to boost their savings, not spending. The goal for these parents is to support the next generation to think longer term when it comes to their finances.
35% of parents intend for their gifts to children to form a financial cushion, boosting savings, not spending
So, how can you turn your savings into a meaningful inheritance? What are the general principles that can help transfer as much wealth as possible to your loved ones?
Early and thoughtful planning is essential. This involves structuring your transfers for maximum tax-efficiency, and protecting wealth as you build it. If you don’t do this, you can risk ‘wealth erosion’.
What is wealth erosion?
The loss of wealth over time, usually caused by poor planning. Inflation is one factor that can cause wealth erosion, as the rise in costs for goods and services reduces your purchasing power. A way to combat inflation is to put your savings into high interest accounts, so your wealth increases above the reduction in value.
The longer your savings are in place, the more they grow
But there’s another risk for savers looking to take part in the Great Wealth Transfer.
A lack of financial literacy
Flagstone’s research also revealed that over half of parents and guardians haven’t told their dependents about their savings (52.41%). This can risk leaving your children ill-prepared to inherit, increasing the chance that the money is spent unwisely.
Counteracting this requires parents and guardians to go beyond honing their own savings strategies in private. Passing this knowledge on to younger generations could make the difference to future social mobility, allowing them to thrive during financially unpredictable times.
Frequently asked questions about the Great Wealth Transfer
Which generation will inherit the most amount of money?
It’s estimated that Millennials will benefit the most from the Great Wealth Transfer.
This is because the Baby Boomer generation enjoyed lower house prices and higher wages than those after them - and grew their wealth significantly as a result.
How much will the average Millennial inherit?
Research from the Institute for Fiscal Studies suggests the average Millennial will inherit around £150,000 from their parents.
The same data suggests one in 10 Millennials could inherit more than £500,000.
Will Gen Z become the richest generation?
It’s unlikely that Gen Z will become the richest generation through inherited wealth.
Most of the money that makes up the Great Wealth Transfer is set to be passed on before 2050 – with a majority going to Millennials.
Why is the Great Wealth Transfer important?
The Great Wealth Transfer marks a shift in wealth from those who experienced low house prices, high wages, and generous pensions, to the next generation.
Younger people inheriting some or all of this wealth will have a better opportunity to thrive despite continually rising house prices and weak wage growth. But they still require smart savings strategies and increased financial literacy to turn this opportunity into generational wealth.
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