The elephant in the room

On reaching his hundredth birthday in 1973, the legendary Hollywood mogul, Adolph Zukor, quipped that “if I’d known I was going to live this long, I’d have taken better care of myself”. While Zukor retired from production at 86, he carried on as Chairman of Paramount Pictures until his death at 103.

Fast forward to today and living to such a great age is becoming ever more routine. In 2019, there were more than 600,000 people in the UK aged 90 or over according to the Office for National Statistics (ONS). The ONS projects that one in three babies born today will live to see their hundredth birthday. The first person to live to 150 may already be alive today.

As 70 becomes the new 40, increased life expectancy opens up wonderful opportunities to enjoy life without the pressures of work and bringing up young children – get out on the golf course, see the world, slow down and relax.

Clearly, however, longevity also creates huge and still far from adequately addressed challenges. The pressures on the health and social care systems are well documented. What is far less discussed – the elephant in the room – is how to transfer wealth between what could now be five or more generations in a family.

Complex generational spread 

This complex generational spread might stretch from a couple with a young family, on to parents reaching the peak of their careers, on to grandparents thinking of winding down towards retirement and then great grandparents living in retirement accommodation or nursing care.

While each family member has quite distinct financial demands, the one thing that they all have in common is a desire to take control of their money, keep their wealth within their family and ensure it benefits those with greatest need – the great grandparents in care, young people struggling to get on the housing ladder and so on.

Moreover, there is abundant wealth to transfer between these multiple generations. At the beginning of the 1970s, the average house price was just over £4,000. By 2020, it had catapulted to more than £230,000. People who bought their homes for relatively modest sums when they were young could now be one of the more than 500,000 owners of properties worth over a million pounds in the UK. Over the next 30 years, it is estimated that the Baby Boomer generation will pass on more than £5 trillion to their children and other beneficiaries. This is a truly staggering sum.

The big question for financial advisers and wealth managers is are we helping people to prepare for this transfer in the most informed, effective and sensitive way? It’s troubling to say, but I think the answer is no.

For a start, billions are being lost paying the 40% inheritance tax on wealth over £325,000 (single person). This is money that could have benefited the younger generations.

Yet wealth transfer is far more than just what happens when people die. It is a continuous intergenerational process that runs throughout peoples’ lives, from paying for a child’s university education, through to selling or passing over control of a family business, or making provision for later life care.

There are multiple pieces in this complex jigsaw that financial advisers, wealth managers and other professionals need to have a clear handle on. Is the will up to date? Is there a succession plan for the family business? Has Power of Attorney been arranged if a family member becomes incapacitated? Who is advising parents about later life decisions that they may find excessively confusing? Could some of the wealth held by older members of the family be released to support the less well-off younger ones? The list goes on.

And these are very personal and particular requirements for lives that are as varied as the population we are part of. What are the wealth transfer arrangements for people who have married again and had children with a new partner, for example?

Falling short

Unfortunately, the wealth transfer default is often an overly one-size-fits-all response. It certainly lacks the personalisation, ability to adapt and flexibility in delivering target outcomes that would be expected from other aspects of financial planning, such as pensions. People are routinely offered trusts that force them to relinquish control of their wealth and take seven years to free them from inheritance tax liabilities.

The services offered by lawyers, financial advisers and wealth managers are very often insufficiently joined up. Perhaps above all, families don’t have, or don’t feel they have, a real chance to articulate their aspirations over how they want their wealth to be shared.

In some ways, the industry’s response is understandable. These are complex and often sensitive issues and there may therefore be a temptation to put them in the ‘too difficult pile’. Regulatory concerns may also encourage advisers with limited experience in this area to opt for tried, but not necessarily optimal, solutions.

Seizing the opportunity

However, we are reaching a turning point. There is certainly much less of a taboo about families discussing financial planning. The COVID-19 pandemic could also be a catalyst for change by spurring people to think about the fragility of their existence and the importance of planning for the future now.

Our aim here at Stellar is to help advisers develop tax-efficient estate planning solutions that reflect families’ individual circumstances and enable them to retain full control of their hard-earned wealth.

We believe that this kind of 21st Century estate planning is not just a chance to address vast societal challenge, but also an opportunity for financial advisers to sharpen their service and differentiation, and offer better, more tailored outcomes for clients.

If you would like to discuss any of the issues raised in this article, please get in touch with one of our team today on 020 3195 3500 or contact enquiries@stellar-am.com.

Important Information

Stellar Asset Management Limited does not offer investment or tax advice or make recommendations regarding investments. Prospective investors should ensure that they read the brochure and fully understand the risk factors before making any investment decision. The value of investments and the income from them may fall as well as rise and is not guaranteed. No assurance or guarantee is given that any targeted returns will be achieved. Forecasts of potential future results are not a reliable indicator of actual future results.

Stellar Asset Management Limited of 20 Chapel Street, Liverpool, L3 9AG is authorised and regulated by the Financial Conduct Authority.