Rising interest rates have shrunk the wealth gaps between typical young and older households by £86,000
28 November 2024Wealth gaps between young and older households widened in the decade running up to the pandemic, but rising interest rates have put this into reverse – with the average wealth gap between households in their 30s and 60s falling by £86,000 over the past five years, according to new Resolution Foundation research published today (Thursday).
The report Inequality control – part of a partnership with the abrdn Financial Fairness Trust – shows that, between 1980 and 2019, UK households enjoyed an unprecedented wealth boom, which saw British household wealth increase from three to seven times national income in 2019.
But while other advanced economies also enjoyed wealth booms over this period of falling interest rates, the UK – unlike the US – did not experience a corresponding rise in wealth inequality.
Over the course of its wealth boom, the share of wealth in Britain owned by the wealthiest one per cent of households increased by just one percentage point (to 21 per cent). In the US, the share owned by the top one per cent increased by 12 percentage points (to 35 per cent).
The report finds that the UK’s stable levels of wealth inequality has been due to the offsetting factors of rising home ownership among those in their 60s (currently baby boomers) reducing wealth inequality within this age group, while falling home ownership among those in their 30s (millennials) has increased wealth gaps between generations.
But since interest rates started rising in response to the recent inflation shock – the UK’s base rate increased from 0.1 per cent in December 2021 to 5.25 per cent in August 2023 – Britain’s wealth boom has started to unwind.
The report finds that, between 2021 and 2023, household wealth fell from eight- to six-times national income – with a peak-to-trough fall of £2.6 trillion in cash terms. The falling value of pensions accounts for over three-quarters (77 per cent) of this fall in wealth. However, because this is largely concentrated in Defined Benefit schemes, recipients won’t be materially worse off due to their lower pension wealth.
The report finds that the typical household wealth of someone who was in their 60s in 2018-20 has fallen by 16 per cent between 2018-20 and 2024 (from £470,000 to £390,000 in today’s prices).
In contrast, the typical wealth of someone in their 30s in 2018-20 has risen by 17 per cent over the past five years (from £50,000 to £59,000) – as house price gains before and during the pandemic have only partly been eroded by higher interest rates and inflation.
As a result, the gap in typical wealth between these two groups has shrunk by £86,000 in real terms (from £420,000 to £330,000), the smallest gap in more than a decade (£290,000 in 2010-12).
The Foundation says that, despite recent falls, much of the wealth boom remains to be passed on down the generations in the form of inheritances and gifts. This means the next phase of Britain’s economic journey may be less about wealth levels rising or falling, and more about the transfer of wealth down through generations.
The report notes that the real value of inheritances rose by two-fifths (42 per cent) between 2004-05 and 2021-22, and that recent shocks are estimated to have taken only five per cent off their value.
Surprisingly however, these large transfers of wealth are likely to reduce rather increase measures of relative wealth inequality. That’s because while poorer households are less likely to receive a bequest, they are far more valuable to those that do receive them. The report notes that for the least wealthy fifth of households, the median financial bequest they receive will deliver a 43 per cent boost to their wealth, compared to just 2 per cent boost to the wealthiest fifth of households.
However, the Foundation cautions that the possibility of falling wealth inequality doesn’t mean that policy makers should be relaxed about how wealth is transferred across generations, especially if absolute wealth gaps widen again.
Policy makers should continue to help vulnerable households build financial buffers and reform the tax system to make sure those with high wealth pay their fair share. This is a process that was started at the new government’s first Budget in October but must go further.
Simon Pittaway, Senior Economist at the Resolution Foundation, said:
“For much of the past four decades, Britain has enjoyed an uninterrupted wealth boom. Falling interest rates have driven up the value of pension pots and house prices, with household wealth hitting a real-terms peak of £21 trillion in early 2021.
“Rising wealth levels have not led to rising inequality here as they have in the US. Greater home ownership has reduced inequality among older households, though later falls in home ownership have widened wealth gaps between them and younger households.
“But rising interest rates has seen household wealth fall by over £2 trillion, with those in their 60s seeing the biggest reduction in wealth. While there’s no guarantee that rising wealth will resume, we can be sure that more wealth will be transferred down through the generations. This poses questions about how young people can hope to get on in life without the help of family wealth.”
Mubin Haq, CEO of abrdn Financial Fairness Trust, said:
“While we have seen a fall in wealth inequality among older people, the reverse has happened among adults in their late 30s and 40s. In real-terms, inequality among younger generations is set to increase as gifts and inheritances cascade down. Not only are the wealthiest more likely to receive an inheritance or gift but they also gain larger sums. The richest fifth were three-times more likely to receive an inheritance of over £100,000 than those in the bottom fifth. Such windfalls can be critical in determining who is able to step onto the housing ladder and are likely to increase absolute wealth inequality.”
Read full report
The report Inequality control – part of a partnership with the abrdn Financial Fairness Trust – shows that, between 1980 and 2019, UK households enjoyed an unprecedented wealth boom, which saw British household wealth increase from three to seven times national income in 2019.
But while other advanced economies also enjoyed wealth booms over this period of falling interest rates, the UK – unlike the US – did not experience a corresponding rise in wealth inequality.
Over the course of its wealth boom, the share of wealth in Britain owned by the wealthiest one per cent of households increased by just one percentage point (to 21 per cent). In the US, the share owned by the top one per cent increased by 12 percentage points (to 35 per cent).
The report finds that the UK’s stable levels of wealth inequality has been due to the offsetting factors of rising home ownership among those in their 60s (currently baby boomers) reducing wealth inequality within this age group, while falling home ownership among those in their 30s (millennials) has increased wealth gaps between generations.
But since interest rates started rising in response to the recent inflation shock – the UK’s base rate increased from 0.1 per cent in December 2021 to 5.25 per cent in August 2023 – Britain’s wealth boom has started to unwind.
The report finds that, between 2021 and 2023, household wealth fell from eight- to six-times national income – with a peak-to-trough fall of £2.6 trillion in cash terms. The falling value of pensions accounts for over three-quarters (77 per cent) of this fall in wealth. However, because this is largely concentrated in Defined Benefit schemes, recipients won’t be materially worse off due to their lower pension wealth.
The report finds that the typical household wealth of someone who was in their 60s in 2018-20 has fallen by 16 per cent between 2018-20 and 2024 (from £470,000 to £390,000 in today’s prices).
In contrast, the typical wealth of someone in their 30s in 2018-20 has risen by 17 per cent over the past five years (from £50,000 to £59,000) – as house price gains before and during the pandemic have only partly been eroded by higher interest rates and inflation.
As a result, the gap in typical wealth between these two groups has shrunk by £86,000 in real terms (from £420,000 to £330,000), the smallest gap in more than a decade (£290,000 in 2010-12).
The Foundation says that, despite recent falls, much of the wealth boom remains to be passed on down the generations in the form of inheritances and gifts. This means the next phase of Britain’s economic journey may be less about wealth levels rising or falling, and more about the transfer of wealth down through generations.
The report notes that the real value of inheritances rose by two-fifths (42 per cent) between 2004-05 and 2021-22, and that recent shocks are estimated to have taken only five per cent off their value.
Surprisingly however, these large transfers of wealth are likely to reduce rather increase measures of relative wealth inequality. That’s because while poorer households are less likely to receive a bequest, they are far more valuable to those that do receive them. The report notes that for the least wealthy fifth of households, the median financial bequest they receive will deliver a 43 per cent boost to their wealth, compared to just 2 per cent boost to the wealthiest fifth of households.
However, the Foundation cautions that the possibility of falling wealth inequality doesn’t mean that policy makers should be relaxed about how wealth is transferred across generations, especially if absolute wealth gaps widen again.
Policy makers should continue to help vulnerable households build financial buffers and reform the tax system to make sure those with high wealth pay their fair share. This is a process that was started at the new government’s first Budget in October but must go further.
Simon Pittaway, Senior Economist at the Resolution Foundation, said:
“For much of the past four decades, Britain has enjoyed an uninterrupted wealth boom. Falling interest rates have driven up the value of pension pots and house prices, with household wealth hitting a real-terms peak of £21 trillion in early 2021.
“Rising wealth levels have not led to rising inequality here as they have in the US. Greater home ownership has reduced inequality among older households, though later falls in home ownership have widened wealth gaps between them and younger households.
“But rising interest rates has seen household wealth fall by over £2 trillion, with those in their 60s seeing the biggest reduction in wealth. While there’s no guarantee that rising wealth will resume, we can be sure that more wealth will be transferred down through the generations. This poses questions about how young people can hope to get on in life without the help of family wealth.”
Mubin Haq, CEO of abrdn Financial Fairness Trust, said:
“While we have seen a fall in wealth inequality among older people, the reverse has happened among adults in their late 30s and 40s. In real-terms, inequality among younger generations is set to increase as gifts and inheritances cascade down. Not only are the wealthiest more likely to receive an inheritance or gift but they also gain larger sums. The richest fifth were three-times more likely to receive an inheritance of over £100,000 than those in the bottom fifth. Such windfalls can be critical in determining who is able to step onto the housing ladder and are likely to increase absolute wealth inequality.”
Read full report