Why an inheritance is not a retirement plan

Global wealth

A fundamental disconnect is emerging in the UK between a younger generation that expects an inheritance and a generation that puts wealth transfer low on the priority list.


Warren Buffett famously said “a very rich person should leave his kids enough to do anything but not enough to do nothing.” As advancements in health care continually impact life expectancies, relying on an inheritance is becoming an increasingly poor financial strategy.

Yet, a fundamental disconnect is emerging in the UK between a younger generation that sees inheritance as a rite of passage and a generation that puts wealth transfer low on the list of priorities.

According to New wealth rising, a survey by The Economist Intelligence Unit (EIU), commissioned by RBC Wealth Management, only 25 percent of high-net-worth individuals (HNWIs) surveyed in the UK consider “leaving an inheritance for my children” as their most important financial goal.

Younger* HNWIs in the UK, however, have different expectations. The survey data reveals 64 percent of this group believe parents have an obligation to leave an inheritance. This is the highest amongst the global regions surveyed, including the U.S. (39 percent), Canada (50 percent) and Asia (48 percent).

The New wealth rising survey, which targets HNWIs, adult children of HNWIs and high-earning professionals across the UK, U.S., Canada, China, Hong Kong, Singapore and Taiwan, explores the future of wealth, what it will be invested in and how it will be invested. With the largest wealth transfer in history underway, major attitudinal shifts are emerging. Interests are swinging from local to global, smart philanthropy is taking hold, and impact- and alternative investing are going mainstream. As wealth shifts—globally and from one generation to the next—the influence of affluence will change.

Dean Moore, managing director & head of Wealth Planning at RBC Wealth Management in the UK, says reluctance held by older generations* often stems from a fear that the volume of wealth could have a detrimental effect on the next generation.

“(The parents are trying to) protect the children from the worst examples of getting too much money too soon,” says Moore. But anxiety surrounding entitlement and its effect on the younger generation is only one element in a wider conversation surrounding the nature of wealth and inheritance. And for two-thirds of young HNWIs expecting an inheritance, this means ensuring there’s a wealth plan in place that doesn’t rely solely on gifts from previous generations.

New wealth ushers in new financial strategies

“People are living longer and healthier for longer so they’re continuing to spend a significant amount of money on things like travelling than perhaps their parents’ generation would have,” says Moore.

Philanthropy is also re-routing the family legacy.

In the UK, 60 percent of HNWIs are confident their wealth will “make more of an impact on the world” than previous generations did, according to The new face of wealth and legacy survey (2018) by The EIU. And for 55 percent of UK respondents, societal causes hold more bearing than wealth accumulation with regards to defining the family legacy.

The challenge, says Moore, is many HNW families observe the tradition of not talking about money with the younger generations. “Generally, people aren’t very good at it,” he says. “But I think it’s really important for the older generation to be pretty clear in terms of what the next generation can expect and when it can expect it.”

The back-up financial plan

From the younger generation’s perspective, Moore suggests having an alternate plan.

“If the inheritance isn’t as significant as they first hoped [they] should be thinking about maximizing their allowances and fully funding their pension plans, making use of different capital gains … building up their independent wealth,” he says. “Should the inheritance come, then great, they’ve got that pot which they can then use for their children.”

A successful wealth plan should also examine how you’re going to protect your human capital.

“You might have a decent job and a good income but if you’re unable to work through illness or accident, how is that going to impact your financial plan … will that income stop?” asks Moore. Preparing for the unexpected is just one part of a nuanced wealth plan. That’s the purpose of an advisor, says Moore — to model these considerations and help you come up with a realistic plan and strategies to work within it.

The plan for an eventual inheritance

Despite the divergent views surrounding the obligatory nature of inheritances, Moore says for many HNW families, passing money to the next generation will end up making sense as part of the overall strategy for protecting the family legacy.

“Once you get to the point where the parents or grandparents have substantially accumulated wealth they’re conceivably never going to be able to spend, other than creating a foundation or philanthropy with the lion share, the likelihood is that wealth is going to pass to each of these generations,” says Moore.

From his perspective, it’s less about if, and more about when. And Moore suggests sooner rather than later. Philanthropy provides a great opportunity for engaging the younger generation.

“(The parents can) put money in a charity or a foundation account, where young children from aged five or six upwards would have a pot of money – maybe £1,000 a year – that they choose which charities benefit,” he says. “They see how the money is used and get to see the impact that sum of money has and they do that year on year (so) when the time comes for them to have wealth in their own hands, they have a much greater sense of the power.”

The alternative to not teaching those lessons early and waiting to pass the wealth forward could be an erosion of the family’s legacy.

“In the UK everything over £325,000 on death is taxed at 40 percent,” says Moore. He adds that, once families see those numbers on paper, they begin to understand the impact on their wealth.

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