Report: Millennials set to rely on inheritance more than previous generations

20 May 2021


Jonathan Smith
Jonathan Smith
Woman walking down the high street holding a take away coffee cup. In the background two woman walk behind her with shopping bags, talking to each other

Over recent years, it’s often been widely speculated that millennials — those born in the 80s through to the mid-90s — will not be as well off as previous generations. Factors like the recession, stagnant wages, and rising house prices are often pointed to as reasons for a generational wealth gap, and this picture is becoming clearer as older millennials reach the age where they may wish to start a family or purchase property.

Now, a new report from the Institute of Fiscal Studies (IFS) has shed light on how much wealth millennials will be set to inherit compared to how much they will accumulate on their own. The report looked at forecasts for the expected inheritance for generations born in the 1960s, 70s, and 80s, as a percentage of overall lifetime income, to find out how reliant younger people would be on the funds passed down.

What did the report find?

The main takeaway from the IFS research is that, while millennials born in the 80s will receive nearly twice the amount of inheritance (16%) as those born in the 60s (9%) as part of lifetime income, they will not amass as much wealth themselves, so may be much more reliant on inherited funds in the future.

This likely means that, in the current difficult financial conditions, inheritance will play a more important role for millennials trying to build their wealth and afford life’s bigger expenses, like buying a home or raising children. It represents a reversal of the trend seen through the 20th century, where there was more scope to gain wealth individually.

Another finding in the report highlighted that increasing reliance on inheritance in the future is also set to increase inequalities in lifetime income between those with richer and poorer parents. Those born in the 80s that receive an inheritance from parents in the bottom fifth of wealth distribution in the UK will receive a 5% increase in income, while those with parents in the top fifth for wealth will see a 29% boost.

What should millennials consider about inheritance?

With inheritance set to play a big role in the future for a whole generation, a careful approach will be necessary to ensure that this wealth is properly managed.

If you are a millennial who is expecting to make use of an inheritance in the future, it really is worth taking a moment to consider what to expect further down the road. Here are some of the most important points you need to think about to begin making the right decisions.

Set financial goals early

As with any major financial decision, it can be helpful to have a plan in advance. Not only will this give you a direction to work towards, but, with a goal already in mind, you will be less tempted to deviate from it the day that you receive your inheritance.

Sit down and think about where you want to be in five, ten, and even twenty years time. Do you aim to own a house? Are you planning to live abroad? What about retiring early with a comfortable pension income? Thinking about your future is a good place to start when you’re creating a plan for your inheritance. You don’t need an exact plan right now, but knowing the direction you want to head can be incredibly helpful.

Always do your research and take financial advice

Before making any important choices, you should always make sure you do a lot of research to make sure you understand where your money is going. You need to have a clear picture of any investment or purchase you plan to make, and it’s also worth sleeping on those big decisions to ensure they’re not being done impulsively.

You should also seriously consider taking advice from a financial adviser, who will be able to listen to your financial goals and assess your circumstances, before recommending the best route to take. They may also have access to financial products not available to the public.

Be aware of Inheritance Tax

While you do not usually need to pay it, it is worthwhile familiarising yourself with the ins and outs of Inheritance Tax and what it means for any wealth that’s passed down to you. This Tax is only applied to estates that are worth more than the £325,000 threshold (at a rate of 40% on funds above the threshold).

The payment of the Tax is typically handled by the executor of the estate, though there are some circumstances where the beneficiary needs to pay. In most cases, you won’t be faced with a bill until further down the line, for example if Income or Capital Gains Taxes become applicable. Though it may not directly affect you, being familiar with Inheritance Tax will help you understand why the entire estate is not passed on when the time comes.

Choose the right place to save

One of the most important considerations you will need to make when it comes to an inheritance lump sum is where to save it in the short to medium term, especially if you need more time to decide on what you want to do with it. You will need to find a savings account that meets your needs and gives your money a place to earn interest while you plan.

If you know that you won’t need to touch the inheritance for a while, you may wish to think about expanding your search to fixed-rate savings accounts. These products differ from easy-access accounts in that they lock your money away for a term, so you won’t be able to touch it. However, you may be able to benefit from higher interest rates, which makes them the ideal choice if you have no immediate plans and won’t need the funds.

Find out more about Atom’s Fixed Saver and what it can do for you.