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Inherited Wealth

Inheritance: Will the money reach those who need it?

In our third article on inherited wealth, Ben Gilmore, Investment Manager at Charles Stanley, urges individuals not to rest on their laurels when it comes to securing their long-term financial future.

Inheritance: Will the money reach those who need it?
Ben profile image for website

by
Ben Gilmore

in Inherited Wealth

21.02.2019

Many are relaxed about their retirement because they expect to inherit a significant amount of money. But those with most confidence in the future may be set for a rude awakening. 

By Ben Gilmore, Investment Manager, Charles Stanley.

The explosion in house prices of the last few decades has changed the financial landscape forever. The middle-aged now have frighteningly-large mortgages and small pensions; young people cannot get a foot on the housing ladder without significant help from their family; and the older generation are often extremely-rich on paper but can be cash-poor as a large proportion of their wealth is tied up in property. This has led to a trend where young people value “experiences” over “things” thus changing their patterns of spending.

We all know that saving for retirement is likely to be a future headache at a national level. But the new financial reality means people have no need to worry, right? After all, with Millennials standing to inherit more than £20 trillion of wealth over the next 20-30 years, our inheritances will come to the rescue, won’t they?

The truth is, maybe not

According to data from credit giant Experian, there is a clear mismatch between the groups who are sleepwalking towards a pensions time-bomb and the groups who are expected to inherit.

Experian’s data divides the UK population across fifteen broad groups. These range from high achieving professionals with substantial earnings potential, to those living far more hand-to-mouth, and everybody in between. Experian then looked at a multitude of different features, starting with the high level areas such as marital status, whether they have children, home ownership, income levels, and ages – and so on. Deep within the numbers are a couple of very interesting sections; the confidence of retiring in a comfortably financial position and those most likely to receive an inheritance.

The three groups that are most relaxed and confident about being in a strong financial position are groups called Family Pressures, Cash Economy and Single Earners. The names of these groups perhaps give clues on the typical make-up of their constituents.

Members of the Family Pressures cohort have a wide age range – and are generally unemployed and receive benefits, with very limited pension or retirement provision. Members of the Cash Economy grouping are usually in – or close to – retirement with very low savings. They tend to live in a home rented from the local authority, or own a low-value property, and have very limited pension income with reliance on benefits. Single Earners have limited savings, pensions and are concerned that the minimum wage is too low.

The top three groups most likely not to have a retirement fund are called Deal Seekers, Earning Potential and our friends from Family Pressures make a further appearance.

Deal Seekers are characterised as mature families with a penchant for switching insurance providers and causing queue build-ups at the supermarkets as they put their money-off vouchers to work. Despite their thrift, they have various sources of debt and do not have significant earnings power, with this reflected in the modest size of their pension pots. Earnings Providers are aspiring young adults who live online and are taking the first steps in building their prospects.

Before moving on to who is most likely to inherit, what about debt? Well, there are various measures including use of unauthorised overdrafts, those behind on mobile phone bills, loans from friends and family and store cards. Family Pressures features heavily, as do the other groups mentioned above. These are also the groups most likely to make impulse purchases and who don’t mind taking risks with their money.  

So, these groups are not in a particularly good position for the long-term, although some of them appear to believe otherwise. If they are light on pensions and they have limited savings and investments, they must clearly be relying on other factors, such as inheritance or some other kind of windfall.

Rightly or wrongly, these groups believe that everything will be alright. Except that it is entirely possible that it won’t be.

The data suggests there are three clear groups who are most likely to receive an inheritance. These groups give a clue to their current position: Money Makers, Established Investors and Career Experience.

Money Makers are people typically in their early 40s who spend much of their income, but also earn significant figures – and their savings and pensions reflect that. They tend to have large mortgages, but they can comfortably service them through strong earnings power and can always fall back on the likely future inheritance.

Established Investors are approaching retirement, generally with pension pots of more than half a million pounds. The Career Experience group are approaching 50 years old and have already made good provision for when they retire, with pension pots approaching half a million.

Shall the meek inherit?

And where do the most confident, dare we say, less affluent, groups rank in likelihood of inheriting? Out of 15 groups, they rank tenth, eleventh and twelfth. They are not the worst-placed out of the population, which is encouraging, until you learn that the groups below them are mostly elderly and too old to inherit.

Things do not look too rosy for these groups – and it isn’t helped by the British culture of spend over save. According to the Office of National Statistics, the savings ratio in the UK is 3.9%, which is lower than other major countries which do plan more for the rainier days. Saving has not always been this low in the UK. In fact, it has not been this low since the early 1960s and did in fact hit just under 15% of income in 1993. Since then, the willingness and ability to save has declined, due to high house prices, low interest rates and an abundance of debt.

The data certainly suggests that inherited wealth will not find its way to those who need it most, and they will continue to use their money for the hand-to-mouth requirements and those subscription fixes. This means today, more than ever, planning for your retirement and the management of family wealth matters.

This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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