Inequality control

The turbulent 2020s have had profound implications for the wealth of the nation: lockdowns pushed saving to unprecedented highs, asset prices surged and then tanked, and high inflation eroded the real value of wealth. This recent turbulence came on the back of decades of rising wealth. But, unlike elsewhere, relative wealth inequality in Britain did not soar during the era of rapidly rising wealth. In this report we discuss what lies behind this puzzling stability, as it is key to understanding the reality of wealth inequality in Britain today, and how it might evolve in future as the dust settles from the pandemic and the cost of living crisis.

In 1980, UK household wealth stood at around three-times national income. By 2019 it had risen to around seven-times national income. This rise was rapid, unprecedented, and driven mostly by passive capital gains as interest rates fell and assets prices soared. But during this time of seismic changes in the total value of wealth, measures of relative wealth inequality were conspicuously stable. This is in stark contrast to the US, where inequality surged over the same period: between 1980 and 2019, the share of wealth owned by the richest 1 per cent grew by 12 percentage points in the US, compared to a rise of less than 1 percentage point in the UK. Avoiding this rise in headline inequality is a good thing, as an increasing concentration of wealth can undermine social cohesion and mobility.

But lurking underneath this headline of static wealth inequality were more pronounced shifts in the level of inequality between age groups at the same point in time. Focusing in on the period between the financial crisis and the pandemic, we find that wealth in Britain became much more unequally shared between young and old. In 2018-20, median wealth among Britons in their 60s was 55 per cent higher in real terms than among those of the same age in 2006-08, whereas median wealth for those in their 30s was a third (34 per cent) lower. This trend should have put upwards pressure on measures of relative wealth inequality. For example, if only the gaps between age groups had changed between 2006-08 and 2018-20, then the share of pension, property and financial wealth owned by the top 1 per cent would have been 15 per cent, rather than its actual value of 12 per cent.

The key reason why headline wealth inequality didn’t increase despite rising inequality between age groups was falling inequality within groups – in particular, among older Britons. For those aged 60 or over, the Gini coefficient of wealth within age groups fell between 2006-08 and 2018-20 (with an average fall of 3 percentage points), meaning that wealth became more equally distributed over time. But this was not the case for all age groups: wealth among those in their late 30s and early 40s was distributed more unequally in 2018-20 than in 2006-08.

The differing fortunes of younger and older Britons are tied together by recent trends in home ownership. The share of 35-44-year-olds owning their own home fell from 73 per cent in 2006-08 to 66 per cent in 2018-20. Home ownership fell particularly sharply for less wealthy members of this group, and so housing wealth became more unequally distributed. Older age groups saw the exact opposite: rising home ownership rates (in part due to cohort effects), concentrated at the bottom of the wealth distribution, led to a more equal distribution of housing wealth.

After rising consistently for decades, wealth has been volatile in recent years. UK households have saved a greater share of income in the past five years than at any point in the past quarter of a century. On its own, this would have gently pushed up the stock of wealth. But changes in interest rates and asset prices have had a far greater impact. After interest rates were cut at the start of the pandemic, and house prices rose in the immediate recovery, household wealth is estimated to have peaked at eight times GDP in 2021. But a sharp reversal of these trends, as interest rates rose to help combat inflation, has led to a huge fall in household wealth. We estimate that household wealth has fallen to around six times GDP in 2023. Peak to trough, household wealth fell by £2.6 trillion in cash terms (between Q1 2022 and Q4 2023). The fluctuating value of pensions have played a major role, accounting for three-quarters (77 per cent) of the fall in Britain’s wealth-to-GDP ratio from its peak in 2021. A key driver has been a fall in the implied value of guaranteed pension incomes, such as those promised in defined benefit (DB) schemes. Although these income streams haven’t changed, the fall in their implied value does mark a significant change. DB pensions had become so valuable in a low-rate world precisely because the income streams they promise had become much harder for younger workers to obtain by earning a return on their savings.

Because individuals around retirement age are particularly exposed to falling pension wealth, recent passive changes in wealth should reduce some of the inequality that built up after the financial crisis between younger and older generations. We estimate that median per-adult family wealth for those who were in their 60s in 2018-20 has fallen 16 per cent by Q3 2024 (from £470,000 to £390,000 in today’s prices). At the same time, wealth for those in their 30s is estimated to have risen by 17 per cent (from £50,000 to £59,000). As a result, the gap in typical wealth between these two age groups has shrunk by £86,000 in real terms to its smallest level in more than a decade.

The significant fall in total wealth, combined with a moderation of inequality between age groups, implies that some of the absolute – or pounds and pence – gaps between families at different points in Britain’s wealth distribution has been reduced. In today’s prices, the gap between average per-adult wealth for families in the top decile and the fifth decile grew from £1.1 million in 2006 to £1.6 million in 2019. But, based on changes in asset prices and interest rates since then, we estimate that this gap has fallen back to around £1.3 million in 2024, about the same size as in 2014. This is still a large gap, but it is the largest sustained fall in absolute wealth gaps since comparable data began nearly 20 years ago.

Despite the recent fall, there remains a historically large amount of wealth to be passed on by older Britons. Between 2004-05 and 202122, the total real-terms amount of inheritances passed down in the UK grew by two-fifths (42 per cent). In real terms, the value assets inherited in 2021-22 is estimated to have fallen by only 5 per cent in the years since then, leaving the total value of inheritances a third (34 per cent) higher than 20 years ago.

Inheritances are therefore set to continue to play a historically large role in shaping the distribution of wealth across ages. And, in recent years, financial gifts have become an increasingly common way for wealth to transfer between generations. But it is those that are already wealthy relative to their peers who are most likely to receive an inheritance or a gift: someone in the top fifth of their age group’s wealth distribution in 2016-18 was two-and-a-half times more likely to receive an inheritance in the following two years than someone in the bottom fifth (5 per cent versus 2 per cent) and twice as likely to receive a financial gift (8 per cent versus 4 per cent). And, when they receive a financial transfer, wealthier recipients are more likely to get a large one. But, despite this clear distributional slant in who receives inheritances and gifts, inheritances may actually reduce relative measures of wealth inequality in the short term. Although the absolute size of financial transfers tends to be largest for those near the top of their age group’s wealth distribution, the size of transfers relative to existing wealth levels is greatest at the bottom – and it is this that is captured in measures like the Gini coefficient. For example, for those in the bottom quintile of their age group’s wealth distribution, the median financial gift is worth 43 per cent of pre-gift wealth. This falls to just 2 per cent for those in the top quintile. So, at the point gifts and inheritances are received, they are likely to reduce relative inequality within age groups.

Although the UK doesn’t face the same scale of wealth inequality as the US, it is not to say all is well. Significant gaps between young and old remain, and gifts and inheritance look set to increase the absolute wealth gaps – if not relative wealth inequality – within age groups.

Policy should, do more to deal with the present reality of Britain’s unbalanced wealth landscape. At the bottom of the wealth distribution, there are millions of families in the UK with very few savings to fall back on in an emergency. In 2018-20, around one-in-three working-age families (30 per cent) had less than £1,000 in accessible savings. Supporting them requires building on what has already been found to work. The extension of Help to Save, announced at the 2024 Autumn Budget, was a welcome step in this direction. But the Government should go further, and the second stage of its Pensions Review should consider reforming pensions auto-enrolment to support employees build precautionary-savings buffers.

Meanwhile, in a world of large passive gains and growing inheritances, more can be done to ensure that wealth taxes pull their weight – which will mean those at the top of the wealth distribution paying more. Here, the Budget took a step in the right direction by broadening the tax base for Inheritance Tax to include pension pots, as well as scaling back tax reliefs for agricultural and business assets. Given the rising prevalence of defined contribution schemes and the removal of compulsory annuitisation in 2015, this was a welcome change. However, the Budget’s changes to Capital Gains Tax – raising headline rates towards marginal tax rates on earnings – fell well short of the fundamental reform that is needed to improve both fairness and economic efficiency.