Wealth and the generations
It has been and will usually be the case that older people collectively own more of the wealth than younger people. Most people make a similar financial journey.
It’s been popular to claim today that young people are getting a bad deal, as older people control most of the wealth. The attempt to set generation against generation is misleading when there are so many examples of the generations co-operating within families, and of wealth moving from one generation to the next through gift and inheritance.
Many parents help their children financially after they have left home, or help them by providing unpaid assistance so they can earn more from work. It is also misleading to think it is some new development that has created the phenomenon of older people owning more wealth.
It has been and will usually be the case that older people collectively own more of the wealth than younger people. Most people’s financial journey is to move from being teenagers with no wealth and no income to being young adults with low starting incomes and the need to borrow to accumulate assets. Life’s financial journey for many is marked by the purchase of a property as the first foray into asset ownership on any scale, followed by the repayment of the mortgage over a working lifetime.
Saving for old age
At the same time, individuals directly – or through their employer, the state – start saving for their pension. Those who gain better-paid employment usually save in other ways as well, accumulating deposits and financial assets. Those who work for themselves and build their own business may in their later years release capital by selling all or part of the business they have built. So it is that over a working lifetime many people change from having no wealth to having a home they own, a pension pot they can draw on in retirement and other savings. They may also inherit money, but often quite late in life.
Only those who inherit when young or are gifted substantial sums, win the lottery or build and sell a business in the early years break free from the normal pattern and establish substantial wealth in their 20s or early 30s.
One of the features of the current social pattern which gets little attention is the extent to which many more young people will in due course inherit decent sums of money from their parents. Many will have to wait until they are pensioners themselves as lifespans extend. The majority, however, now stand to inherit the wealth that comes from their parents’ home or from their parents’ business and savings. It is true, a minority of parents will have to sell their home to pay for nursing home fees. A few will have spent the lot, determined to enjoy it for themselves. Most will want to pass on wealth to their children and will protect it to do so.
A financial journey
Financial service businesses set out to help people plan their financial journey, and advise on how to invest and manage the savings as they build up. The industry provides insurance products, pension plan products, tax-privileged savings like ISAs and a range of general investment services ranging from a relatively safe deposit or short-term bond through to risky exposures to shares and other more exotic financial assets.
Families with savings and property accumulated over the years often engage more than one generation in its management, taking advice on how to plan the investment to benefit more than one generation. The different generations may have different perspectives on investment issues. Younger people often lead the discussion on the moral and environmental issues in investment for example, whilst older people may be more concerned about rates of return and future tax liabilities. Families provide a forum for discussing the right balance of considerations that go into a plan on how best to manage the family money.
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John Redwood is Chief Global Strategist at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.