One in five baby boomers is a millionaire: Why it’s important to keep track of your wealth

Inheritance Tax

Since the financial crisis, wealth among the baby boomer generation has almost doubled, according to research. With more baby boomers than ever now considered millionaires, it’s crucial they keep track of their wealth and reflect the returns in their plans.

Benefitting from rising house prices, stock market gains and Final Salary pensions, the research indicates that one in five people over 65 are now millionaires when all assets are considered. Prior to the financial crisis, the same could be said for just 7% of those over 65. The study also found:

  • The amount of wealth held by baby boomers has nearly doubled since the financial crisis in real terms; rising from £2.4 trillion to £4.7 trillion
  • Those aged over 65 hold a third of the UK’s household wealth, compared to a quarter ten years ago
  • This group increased their wealth twice as fast as the average UK household
  • The average baby boomer household is now worth £1.1 million, over three times the national average of £259,400

While the research indicates that baby boomers have benefitted from growing wealth, it’s entirely possible the pace of growth hasn’t been noticed. Some of the increase has come from assets that don’t have a direct impact on income. Property prices are an example of this; according to the UK House Price Index, the average property has experienced a 43% increase in value over the last ten years. It’s a trend that may have significantly boosted your overall net worth, but, unless you’ve sold a property, it’s unlikely to have influenced your lifestyle.

But it should be considered, and it could have an impact on your plans. Keeping an eye on your overall net wealth is important for many reasons, but one key area is Inheritance Tax (IHT).

Rising wealth and Inheritance Tax

Unwittingly reaching the millionaire milestone is likely to push you over the threshold for IHT. While there are many actions that can be taken to reduce the IHT bill on your estate, these typically require preparation. Understanding your overall net wealth and how it’s changing is crucial for passing as much on to your loved ones as possible, rather than the taxman.

The current standard IHT rate is 40%, potentially reducing the inheritance you leave beneficiaries significantly. In 2018, IHT collected by HM Revenue & Customs (HMRC) reached £5.2 billion.

IHT is paid on the value of your estate that exceeds £325,000. If you’re passing on your main home to children or grandchildren, this can increase by a further £125,000, to £450,000, thanks to the Residence Nil-Rate Band. By 2020/21 the Residence Nil-Rate Band will have increased to £175,000, taking the maximum you can leave to loved ones, without being liable for IHT, to £500,000. Both the standard and Residence Nil-Rate Band can be passed between spouses and civil partners if unused, bringing the total amount you can pass on free of IHT to £1 million from 2020/21.

If you don’t know how much your home is currently worth, the projected value of an investment portfolio or the value of money still held in pensions, you could be closer to the threshold than you think. Keeping track of your wealth and how it’s growing is critical for efficient IHT planning.

If you’re unsure whether your estate could be liable for IHT on your death, please contact us. We’re here to help you understand what tax may be due and how to mitigate the bill as much as possible.

The influence on your plans

Of course, it’s not just IHT liability that will change if your wealth has increased. It should be reflected in other steps that you take too.

Reassessing your financial strategy: Your financial strategy should be influenced by a number of factors, including your total wealth, capacity for loss, and disposable income. Increasing overall wealth should, therefore, impact your financial plan too; from the level of risk you take with investments to your day-to-day spending. If you haven’t factored in your changing financial fortune in a while, you could find that your strategy is no longer the most appropriate option.

Changing your retirement lifestyle: Without realising how the value of your assets has changed, you may be living more frugally in retirement than you need to. If you could increase your income from investments or downsize your home to take a lump sum, would your aspirations change? An increased value may mean you’re now able to achieve goals you had written off financially just ten years ago. Care should be taken here to ensure longevity risk is not impacted. People are generally living longer so although I appreciate the message, taking more out than is necessary is not the right thing to do in most instances. Furthermore, within the pension this is IHT protected, so bringing more out also impacts upon IHT planning. Furthermore, any withdrawals will be tested against the client tax allowance for income tax purposes.

Supporting loved ones: While we’ve mentioned leaving an inheritance to loved ones, it’s becoming increasingly common to gift during your lifetime. This gives you the benefit of seeing the impact of your generosity and potentially supporting loved ones at times when they’re facing financial pressure, such as buying their first home. Understanding how your wealth is growing can give you the confidence to provide financial support for loved ones.

If you’d like to discuss your wealth, projections and plans, please contact us. Our goal is to help you create the lifestyle you want to achieve, maximising the wealth you’ve built up.

Please note: The Financial Conduct Authority does not regulate Inheritance Tax Planning. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.