The Secrets of Retaining Wealth Over Successive Generations

If you’ve ever spent time playing with a compound interest calculator, you may have discovered a powerful fact about wealth creation: compounding of interest can result in staggering financial returns over very long periods.

For example, a £20,000 lump sum invested at a 5% return will grow as follows:

• £25,667 after 5 years
• £32,940 after 10 years
• £54,252 after 20 years
• £242,387 after 50 years
• £2,937,588.99 after 100 years.

If you’re shocked by the magnitude of the difference between 50 and 100 years, you’re not alone. Investments that grow at a compound growth rate will increase exponentially. Our human brains aren’t good at grasping exponential growth and tend to underestimate its effects over the long term.

Of course, in reality, we would not expect to save a pot of money for 100 years, because even in the UK, the life expectancy is currently 81 years old. Therefore, even if we saved a lump sum when we turn 20, we could only expect to live for 60 more years before we die.

However, it’s important to remember that money lives on, and that through inheritance, a single lump sum of money can move down the generations, continuing to compound as it goes.

Therefore, while turning £20,000 into almost £3m of wealth might not be possible in your lifetime, it is possible to bestow this gift onto your grandchildren and their children.

Welcome to the world of generational wealth management.

The risks to generational wealth

To retain wealth, we first need to understand what risks face your money as it attempts to grow and perpetual itself over the decades.

1. Inflation risks

As the Bank of England steadily increases the supply of money as the economy grows, it tends to print more money than strictly necessary, resulting in a gradual erosion of the spending power of every pound. In some years, it can be modest (e.g. 2019: 1.79%) whereas in 2021 inflation breached 4% for the first time in recent memory.

Just as the effect of compound interest is underestimated over time, the power of inflation is neglected even more so.

To address inflation risk, wealth managers invest the majority of wealth into non-monetary investments, such as shares and property. Examples of monetary assets include deposit accounts and savings bonds. As non-monetary assets correspond to tangible assets and businesses, their value in pounds should keep up with high inflation because their inherent worth has not diminished.

2. Taxation risk

Personal taxation on savings and investments changes most years, being enacted through the annual Budget presented by the Chancellor of the Exchequer. But the tax which is arguably the most dangerous to generational wealth is inheritance tax.

Currently, at a headline rate of 40%, inheritance tax can almost halve the value of savings passed to descents above the nil-rate-band of £325,000 with some exceptions for the primary residence.

To address taxation risk, wealth managers leverage advice from financial planners and tax advisers to minimise tax liabilities. HMRC provides an exemption from inheritance tax for certain types of business assets, and other legal forms (such as trusts) can be used to move wealth outside of the personal estate of the individual. #

You should only pursue a tax avoidance strategy if recommended by a reputable tax professional because complex schemes promoted by unscrupulous firms can sometimes cross the line into tax evasion which is a crime.

3. Investment risk

The value of investments can go up or down. While the long-term stock market outlook is always rosy, if too much wealth is concentrated in a few assets, then its value is vulnerable to the volatile ups and downs of individual companies or investments, which do sometimes fail.

Investment risk can be mitigated but never eliminated. Ultimately, the higher returns investments is designed to compensate investors for taking risks. Therefore one cannot be enjoyed without the other.

The best wealth managers will understand your risk tolerance and attitudes before proposing an investment portfolio. This way, they can seek the highest possible return while respecting the maximum amount of risk you are happy to accept.

Retaining wealth over generations requires a broad range of advice from experts in investment, tax and business succession planning areas. Private banks and wealth managers will usually have all areas of expertise ‘in-house’, so that a single account manager can bring in these different strands of knowledge to create a holistic financial plan which will give your wealth the best chance of growing and thriving for the benefit of future generations.

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