Does it bother you that the UK is riven with generational wealth inequality – that old people are much richer than young people? Maybe it should.
After all, Office for National Statistics numbers show us very clearly that the over-65s hold much more of the UK’s wealth than any other group. Just over 50% of those aged 55 to 65 have household wealth of more than £500,000. A mere 12% of those aged 25 to 34 have amassed the same level. But if it does bother you, what exactly do you propose should be done about it?
It seems obvious that the elderly should have piles more cash stashed away than the young. They have had more time to develop the skills that bring high income, more time to borrow and let inflation help them pay back their debts; more time to save and invest; and of course more time to inherit.
Imagine a system where everyone of whatever age or skill level was paid £50,000 a year for whatever job they did. No exceptions. Would this get rid of intergenerational wealth inequality? No. Over time, people would still be able to save and to benefit from the miracles of compounding and inflation. Older people would still be richer. The only way to make it work would be to insist that everyone started out with a high salary and then to cut it as they aged. That would stop this accumulation business in its tracks. It would also be nuts.
Look at it this way, and you can see that it is the natural order of things that the young should be poor and the old should be rich. Perfectly reasonable in a functioning capitalist society.
That doesn’t mean we don’t have a problem. We do, because the wealth gap is widening. Various studies have shown, in the words of the Bank for International Settlements, that extreme monetary policy “may have added to inequality to the extent that it has boosted equity prices”.
I don’t think we need the word “may” there. Monetary policy has had a huge effect on the price of all assets – and in the UK, the price rise causing the most pain is that of property. We know that very low interest rates in the UK have had a major impact on households. The result is that what was once a natural level of inequality is now a scarily large one, and one that we are constantly told we must address if the young are ever to have a chance of home ownership or prosperous old age.
But the point is that no one takes their mortgage-free house or their Isa to the grave with them. They give it away before they die or it falls, mostly free of inheritance tax, into the waiting hands of their offspring when they do.
Royal London tells us that about four million of the 17 million people currently aged 25-44 will inherit cash from their grandparents (to the tune of £400bn, apparently). Furthermore, two in five have already had lump sums from grandparents, and 50% have accepted lump sums from their parents.
We also know that much of this money goes directly into the housing market: Legal & General reckons that “Bomad” (the Bank of Mum and Dad) will help fund more than a quarter of all house purchases in the UK this year. This will cost parents £6.5bn and – on the basis of cash handed out – make them the equivalent of the ninth-largest mortgage lender in the UK. Only 50% of the cash is loaned – the rest is gifted – and the average handout comes to £24,000. How’s that for a wealth cascade?
If you have adult children and you haven’t yet given them anything towards housing you might be feeling a bit guilty by now. So what if you want to do your bit to ease wealth inequalities (and relations) between the generations?
The obvious first step is to see what you can afford. The greatest gift most parents can give their children is their own financial security: but they might thank you less for funding their flat deposit if you later run out of money and ask to move in.
The second is to recognise that you can’t take back gifts once given (not even if your daughter marries a man you despise and he wants half the flat when they get divorced to fund a globetrotting surf trip) and that loans to family members to buy houses often turn out to be gifts.
To avoid the latter you must write a firm and detailed loan agreement. But even that won’t necessarily be enough. Houses are nothing if not illiquid (only a small percentage of the houses on the market sell in any one month) so you can’t ever get your money back in a hurry.
It is also worth remembering that unless your name is actually on the title, you have no security: you won’t be in line for anything should the house be repossessed. All this is tricky for modern parents: according to a survey from Prudential, 75% of the over-55s want to hang on to some control over the money that goes to their children. Best perhaps to forget loans and to simply work out what you can afford to “give and forget”.
Alternatively, you could sit back, book a cruise and forget the whole thing. Average house prices are falling (down two months in a row on Nationwide’s numbers) and that’s a good thing. Shifting cash around inside individual families is a very inefficient way for property inequality to be sorted out. It doesn’t benefit everyone equally and it involves a potentially toxic mix of admin and family negotiation.
A much better way for this to happen is for house prices to come down to their historical average relative to wages. Older people will then have houses that are worth less (which will make no difference at all to them) but young people will be able to afford to buy houses (which will make a huge difference to them). That, I think, is the kind of simple and mostly painless wealth transfer we should all be rooting for.
• This article was first published in the Financial Times