The cost-of-living crisis is a huge problem currently facing many Brits – with some unable to afford bills.
Rising inflation and costs have also impacted high net worth (HNW) individuals.
The plans they put in place for gifting, inheritance and retirement have been worked out on outdated models not foreseeing the financial issues that the world is currently facing.
So, should HNWs look to revisit their plans amid rising costs and inflation?
Nick Ritchie, senior director, wealth planning at RBC Wealth Management, told International Adviser: “Advisers have a duty of care to help their clients understand how a change in financial conditions will impact them specifically. Those who are highly leveraged will be facing a very different set of challenges to those who are overweight cash, for example.
“A deterioration of financial conditions and changes in fiscal policy, highlight the benefit of regularly revisiting plans to ensure they are suited to the prevailing environment. Part of an annual review will involve updating a client’s goals and priorities, but also assessing how any plans made to date are faring in the current climate.
“A good example of this is cashflow requirements in retirement. We’re seeing a lot of clients wanting to revisit their retirement plans. For most HNW individuals, this is less about being certain they have enough, but more about updating their understanding of ‘how much is enough?’ and how that might change with inflation running at 10% versus 2% or 3%.
“A lot of our clients see this as an essential precursor to conversations about gifting and succession – planning for one’s own need first can then provide confidence in how much can be gifted and when. And whilst one might expect higher inflation and living costs to translate to less desire to gift, we’re actually seeing the reverse.
“Clients worry their children and grandchildren simply won’t have the same tailwinds as them, be it rising property prices, low interest rates or well-funded state and private pension schemes. There is a desire to help children with perhaps smaller but more frequent gifts to help limit the impact of current financial stresses.”
At the same time, wealth firm Killik & Co has found millions of parents in the UK are changing their inheritance plans in response to the cost-of-living crisis.
The findings show the economic situation has directly affected wealth transfer plans of more than a fifth (22%) of parents.
Some 72% people in this group have already given or are planning to pass on money to their children early, and a quarter (26%) are now expecting to leave nothing at all.
As households continue to face huge inflationary pressures, a third (33%) of parents said they’re worried about the ability of their children or grandchildren to cope, yet 13% are no longer able to help them financially. Only a fifth (20%) are confident they can deal with the impact on their own finances, while 10% are now receiving financial support to help with higher living costs.
William Stevens, head of financial planning at Killik & Co, said: “Living costs are rising at a pace that we haven’t seen for decades, so it’s not surprising that people are having to make some difficult financial decisions.
“We know that parents want to make a positive contribution when they pass on wealth, and this is no different during a time of economic uncertainty. Our research shows that many are bringing forward inheritance plans to help their children and some are having to rethink their plans because of the rising cost of living. Parents naturally want to put their children first, but it’s vital that they consider their own needs.
“We strongly recommend that anyone considering making changes to legacy plans should speak to a financial planning expert who can provide clarity and tailored advice on the long-term implications, as well as how to make decisions that make the most financial sense for all.”
Failing to prepare
Unfortunately, not all HNWs are up to date with plans, as estate planning is still an area overlooked by some. IA recently reported on a survey which found 40% of HNWs globally do not have a formal inheritance plan.
RBC’s Ritchie added: “There’s loads of press coverage about estate planning and inheritance tax, so most clients have an awareness.
“But there is still a lightbulb moment when clients say they didn’t realise it impacted them or they were aware of it but didn’t realise the extent of the problem. Our job is to help educate the client and understand the quantum of the problem.
“Everything is interconnected, so whilst a conversation about the impact of inflation on cashflow requirements in retirement may be the starting point, the very nature of our clients’ wealth means one must be considering succession objectives as part of this.”