Why you should pass on wealth to your children

Young millennials and Generation Z are facing a blizzard of financial burdens as they leave university and enter the workforce.

An ageing population leaving the workforce means that workers in their 20s and 30s must disproportionately pick up the tab for social care and NHS costs throughout their working lives.

An increasing National Insurance burden for those earning over the average UK salary and rising council taxes that partly fund social care mean a reduction in both pre and post-tax income.

These two generations have spent their lives growing up from financial crisis to financial crisis. From the dot-com bubble to the Great Financial Crisis of 2008, to a decade of austerity and rocketing house prices, to COVID-19 and uncontrollable living cost increases.

The dire financial environment that young people find themselves in is often draped against calls for more intergenerational fairness. Previous generations benefitted from a lower tax burden, a more productive economy, and a higher net-worth at comparable ages.

The baby boomer generation is estimated to control around 80% of UK private wealth.

Some parents and grandparents concerned about their children and grandchildren recognise the necessity of transfers and inheritances to give their offspring a financial boost in volatile times.

Let’s explore why helping your kids matters and the need for intergenerational wealth transfers.

The current state of intergenerational inequality

Wealth, income, and spending

Research from the Intergenerational Foundation shows that over the past decade younger age groups were more likely to be unemployed, whilst the youngest age group (16–17-year-olds) saw the biggest decrease in hourly wages in real terms from £5.60 in 2004 to £5.12 in 2020.

There is also a large wealth gap between the oldest and youngest age groups. This is only natural because older people have had longer to accumulate wealth and benefit from rising asset prices.

However, the wealth gap continues to increase, and against a dire financial environment with spiralling inflation, younger generations are finding wealth accumulation increasingly out of reach.

The median individual wealth gap between the oldest and youngest age groups has increased by around 43% in 6 years, from approximately £208,000 in 2010-12 to £298,000 in 2016-2018.

Total household wealth in the UK rose by about £900 billion between February 2020 and May 2021, largely as a result of increases in non-UK equities and housing. Families headed by older age groups (65 and over) accrued 42% of this overall wealth increase, a staggering £378 billion.

It’s also the case that due to inflation and stagnating wages, age groups under-35 now spend the highest percentage of their income on essential goods and services out of all age groups: around 62% of their income.

To add to this, the government is more likely to spend on pensioners than children and working-age adults when it comes to public services. In 2018/2019, the government was spending approximately £20,800 on each pensioner in comparison to £14,700 on each child – a £6,000 difference.

The Covid-19 pandemic disproportionately affected younger people in economic terms. Three in five job losses in the year after February 2020 were from people under the age of 25.

This labour market difficulty has meant that people aged 25-34 consistently had the highest number of Universal Credit claimants throughout the Covid-19 pandemic. They also had the highest number of people on furlough.

Housing

In the midst of recurring financial volatility, homeownership has become an increasingly impossible dream for younger people. Between 2003 and 2020, homeownership rates declined for all age groups except those over age 65, which increased from 71% to 80%.

The age groups with the biggest decrease in homeownership rates were 35–44 (from 74% to 56%), 25–34 (from 59% to 41%) and 16–24 (from 24% to 14%). This coincides with all age groups except for over-65s experiencing a decline in living space.

Declining rates of homeownership are occurring against a backdrop of perpetual housing market inflation, with average property prices increasing from £85,000 to £277,00 between 2000 and 2022, representing a 226% increase in just over 20 years.

It’s not the case that earnings have increased in pace with house prices. Data from the ONS shows that the house price to workplace-based earnings ratio has multiplied dramatically. You would have needed, on average, 4 times your income to afford a house in England in the year 2000. This has shot all the way up to needing 9 times the average income to afford the average house in 2021.

Housing affordability is one of the direst pictures of intergenerational inequality, with the house price to workplace-based earnings ratio more than doubling, leaving homeownership further out of reach for millions who have just entered the workforce in the past decade.

Now that we’ve gauged the financial difficulty affecting younger people, let’s look at why passing on wealth to your children is important.

Why you should pass on wealth to your children

Having to rely on the generosity of older generations falls in stark contrast to the widely held belief that mere hard work should increase social and economic mobility.

The reality, however, is that a younger generation in financial turmoil and an ageing population with ever increasing wealth means intergenerational transfers and inheritances will play an increasingly important part in the British financial landscape.

Research from the Resolution Foundation estimates that the value of wealth transfers is set to double over the next 20 years as the baby-boomer generation continues to entire late retirement.

So, why is it important that wealth is passed on?

For the simple reason that the increasing value of wealth makes it an invaluable resource for those who have accumulated it, bestowing a greater ability to absorb shocks to income and facilitating the purchase of significant assets, namely, housing.

Without such wealth, younger people face a more precarious financial life.

It is estimated that the stock of wealth stood at 7.6 times GDP at the end of 2020.

Given the predicament younger generations find themselves in, receipts of even a fraction of this wealth via transfers and inheritance can dramatically alter financial decisions and lives.

Without some form of transfers and inheritance, younger people, especially from more disadvantaged socio-economic backgrounds, will find it immensely difficult to climb up the percentiles of wealth. This is especially the case given that value of assets is outpacing income, making it harder to save their way up the wealth distribution.

The unfortunate news is that 68% of adults in the UK currently do not expect or do not know if they will receive a wealth transfer of any kind.

It is also unfortunately the case that the wealthiest 20% of families are 4-5 times more likely to receive a transfer of wealth than the poorest 20% of families. This will perpetuate inequality and create an even more uneven playing field in the future between those who benefitted from their parents’ wealth and those who received nothing.

Coming back to the concrete reasons why wealth should be passed on:

• 33% of adults use receipts of wealth to increase savings.
• 30% of adults use receipts of wealth to purchase a home or own their home outright.
• 16% of adults use receipts of wealth to reduce their debt.
• 4% of adults use receipts of wealth for education purposes.

Most recipients of wealth report that receiving wealth has had a significant impact on their lives (after they receive the transfer).

This data from the Resolution Foundation quite clearly shows the positive impact passing on wealth can have on your children.

The most startling statistic is that 13% of recipients of wealth report that they purchased a home that would otherwise have been impossible. This is a total of 6% of homeowners in the UK, demonstrating the power of the significant stores of wealth.

Transferring wealth to your children can create significant life opportunities for a lot of people. This is especially true given the intergenerational equality that persists today as outlined above.

The good news is that around half of people of retirement age are expecting to give a significant gift or leave an inheritance for the next generation.

However, around half of this group have yet to take any direct actions to facilitate future transfers. This is doubly important for Muslims as we must distribute inheritance according to the guidelines provided by Sharia.

It’s also the case that without preparing for transfers, and especially inheritance, countless amounts of people lose money paying inheritance tax that they don’t need to pay. This could all be remedied by having those important discussions beforehand and creating a will.

It’s important to at least begin to think about transfers of wealth to help your children and give their financial life a boost in an increasingly inflationary environment.

Check out our guide to Islamic Wills for more on how to transfer wealth tax-efficiently.