Increasing reliance on inheritance will widen gap between rich and poor
The Institute for Fiscal Studies (IFS) has said the growing size of inheritances means people’s overall wealth is increasingly likely to be determined by their parents’ assets rather than their own earnings.
But for those unable to rely on money or assets being passed on from parents or grandparents, life chances will be diminished in comparison.
Inheritances have been growing as a share of national income in the UK since the 1970s, the IFS said.
And it believes inheritances are set to grow dramatically compared with other sources of income – meaning they will become increasingly important and widen the gap between the rich and the less wealthy.
This signals a profound social change as assets passed down in wills become a bigger driver of differences in living standards.
Existing disparities between older and younger generations are expected by the IFS to translate into reduced social mobility within younger generations in the future.
And the smaller inheritances received by those with poorer parents will mean they have more ground to make up – making it increasingly hard for those with poor parents to move into higher income distribution brackets.
Liz Emerson, co-founder of the Intergenerational Foundation, said the average age at which people were receiving inheritances had also increased to 67.
“So thinking that inheritances will help younger generations is actually not quite right because it will be the boomer generation that will benefit most.”
And she said: “If you are brick rich and cash poor, your inheritance is likely to be higher in the South of England.”
She said those in the South were likely to inherit more “because of the price of their houses”, but she added: “That only helps those who have property.”
The Intergenerational Foundation has campaigned for better rules over lifelong giving and a lift of the cap on how much can be handed over to family as a gift.
People with higher incomes tend to be more likely to be able to reduce the amount that they save in anticipation of receiving future inheritances, meaning they could be more likely see a larger effect on their current living standards, the IFS said.
David Sturrock, a senior research economist at IFS and an author of the report, said: “The increasing levels of wealth held by older generations and the lack of income growth for younger generations are together driving an inter-generational economic divide.
“But these trends also mean that inheritances are set to become more important in future, widening the gap between those with rich parents and those with poor parents. The growing importance of inherited wealth will be a profound societal shift, and one with worrying consequences for social mobility.
“As inheritances become larger, any policies that redistribute inheritances will have bigger impacts on inequality and social mobility, and this should increase the pressure to rationalise our system of inheritance taxation.
“Our findings underline the need to kickstart income growth for younger generations, not just to improve living standards but also to limit the importance of parental wealth and therefore drive social mobility too.”
Alex Beer, welfare programme head at the Nuffield Foundation, said: “The pandemic has highlighted and exacerbated the social and economic inequalities within our society.
“This research shines a light on ways in which those inequalities are set to increase even further with the growing importance of inheritances in lifetime incomes.
“If we are to improve social mobility, policies need to focus on improving living standards for all and on tackling discrimination and disadvantage.”