Younger UK generations will be depending on their inheritance as overall wealth is likely to be heavily impacted by parental assets rather than their own earnings, according to new research by the Institute for Fiscal Studies (IFS).
The report, funded by the Nuffield Foundation, made projections of the inheritance to be received by the 1960s, 1970s and 1980s-born generations in the UK and found that inheritances are set to grow dramatically compared to other income.
Inheritances have been growing as a share of national income in the UK since the 1970s, the IFS research paper called 'Inheritances and inequality over the life cycle: what will they mean for younger generations?' stated.
This trend looks set to continue as generations at older ages hold more wealth than their immediate predecessors but younger generations have no higher incomes than the generations born just before them.
"What will this mean for inequalities in living standards and wealth? Does the growth in inheritances mean people's living standards will increasingly be determined by who their parents are? If people anticipate that they are going to inherit in future, could that influence their decisions about how much to spend and save today?", the report said.
Paul Johnson, director of the IFS, said: "Rising house prices, growing wealth and stagnant earnings mean that inheritances are becoming ever more important in determining life chances and lifetime income. Relative to other sources of income, inheritances are likely to be about twice as important to the generation born in the 1980s as they were for those of us born in the 1960s. That trend looks set to continue.
"Given all the publicity afforded to house prices, and indeed to the increasing divergence in fortunes between the wealthy baby boomers and their struggling children and grandchildren, this might not come as a great surprise. Nevertheless, it is the reversal of a trend which stretched for most of the 20th century, a century during which one's own efforts became more important relative to inherited wealth. Reward for effort and talent is on the wane as the power of the brute luck of family wealth reasserts itself."
He added: "It is bad enough that parental background is such a strong determinant of educational and labour market success. But at least we all have some individual responsibility for how well we progress, even if some have much better chances than others. Our inheritances we cannot control. And as a new report published today by my colleagues at the Institute for Fiscal Studies shows, these inheritances are likely to play an increasingly important role in constraining social mobility.
"Here is one remarkable statistic. It looks likely that for people born in the 1980s whose parents were in the top fifth of the wealth distribution, their inheritance could increase their lifetime income by nearly 30 per cent. For every pound they earn, or receive in pensions and benefits, they'll get nearly 30p of inheritance. Despite the fact that their incomes are much lower on average, those born at the same time but with parents in the bottom fifth of the wealth distribution are likely to receive inheritances that add only 5 per cent to their lifetime income.
"Already, for the 1960s generation, it looks as if about a quarter of the difference in lifetime living standards between those with rich and poor parents is being driven by inheritance. For those born in the 1980s that's likely to rise to a third."
Among the IFS's report's key findings is that inheritances are likely to be larger compared with lifetime incomes for younger generations than for their predecessors.
For those born in the 1980s, average inheritances compared to lifetime income are projected to be almost twice as large as for those born in the 1960s. Inheritances will be worth 9% of household lifetime (non-inheritance) income for those born in the 1960s, rising to 16% for those born in the 1980s.
While inheritances are set to be larger for those with higher incomes, inheritances as a percentage of lifetime income look likely to be similar, on average, for low- and high-income households.
Among the 1980s-born, the median lifetime inheritance receipt for households in the bottom fifth by lifetime income will be around £150,000, and for households in the top fifth it will be around £390,000.
Among the 1980s-born, the median lifetime inheritance receipt as a percentage of lifetime income will be around 15% for households in the bottom fifth by lifetime income, very similar to the 16% projected for the top fifth.
The IFS further reveals that Inheritances are set to be increasingly important in increasing inequalities between those with richer and poorer parents, reducing social mobility
Inheritances are set to increase inequalities in lifetime income between those with richer and poorer parents.
For those born in the 1960s, inheritances are projected to increase lifetime incomes by 2%, on average, for those with parents in the bottom fifth of the wealth distribution and by 17% for those with parents in the top fifth.
The effect of inheritances on inequalities by parental background is projected to be larger for younger generations. For those born in the 1980s, inheritances are projected to increase lifetime incomes by 5%, on average, for those with parents in the bottom fifth of the wealth distribution and by 29% for those with parents in the top fifth.
While inheritances are likely to have their biggest effect on living standards later in life, once they are received, the anticipation of future inheritances may have consequences for outcomes today:
The percentage of individuals expecting to receive an inheritance rose from 72% of those born in the 1960s to 81% of those born in the 1980s.
An economic model of savings decisions projects that those born in the 1980s will on average hold 9%, or around £16,000, less wealth at the age of 45 because they anticipate a future inheritance.
As those with higher incomes are more likely to be able or willing to reduce the amount that they save in anticipation of inheriting, they likely see a larger effect on their living standards today:
IFS's modelling finds that for 1980s-born, the bottom fifth of households by lifetime income effectively spend 11% of their inheritance in advance of receiving it whereas the top fifth by lifetime income spend 33% in advance.
The growth of inheritances means that policies that successfully redistribute them would have larger effects on inequality and social mobility for later-born generations.
