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.
“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.”
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.
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.
This publication has been issued by Royal Bank of Canada on behalf of certain RBC ® companies that form part of the international network of RBC Wealth Management. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by Royal Bank of Canada, its affiliates or subsidiaries.
The information contained in this report has been compiled by Royal Bank of Canada and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgments as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Every province in Canada, state in the U.S. and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, any securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.
This material is prepared for general circulation to clients, including clients who are affiliates of Royal Bank of Canada, and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law neither Royal Bank of Canada nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of Royal Bank of Canada.
Clients of United Kingdom companies may be entitled to compensation from the UK Financial Services Compensation Scheme if any of these entities cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £85,000. The Channel Island subsidiaries are not covered by the UK Financial Services Compensation Scheme; the offices of Royal Bank of Canada (Channel Islands) Limited in Guernsey and Jersey are covered by the respective compensation schemes in these jurisdictions for deposit taking business only.
We want to talk about your financial future.