The growing importance of inheritance
A recent study by The Institute for Fiscal Studies (IFS), that drew data from a combination of resources, concluded that inheritances are becoming an ever more important component of personal wealth.
The research has suggested that there will be a significant change in the inheritances that will be received by those born in the 1980s compared to those born in the 1960s.
The key takeaways from the research are as follows.
1. Inheritances are likely to be larger compared with lifetime incomes for younger generations than for their predecessors.
The IFS measures inheritance as a proportion of lifetime income for the recipient. For the Millennials born in the 1980s the average inheritances compared to lifetime income is projected to be nearly double that which the Baby Boomers born in the 1960s will receive. On average, for those Baby Boomers, inheritances could be around 9% of household income, which could rise to 16% for Millennials.
2. Inheritances as a percentage of lifetime income look likely to be similar, on average, for low-income and high-income households.
Within the Millennials, it is projected that the median lifetime inheritance receipt as a percentage of their lifetime income will be around 15% for households in the bottom fifth, compared to a similar 16% for those in the top fifth. Although we shouldn’t let this fool us, as in cash terms there is still quite a disparity, with those percentages translating to between £150,000 and £390,000.
3. Inheritances are set to increase inequalities between those with richer and poorer parents.
It is looking like inheritances will only make inequalities between lifetime income worse. For those born in the 1960s, it is estimated that inheritances will increase their lifetime income by just 2% on average, for those with parents in the bottom fifth, and by 17% for those who have parents in the top fifth.
And it is predicted to get worse for the younger generations. For those born in the 1980s, it is estimated that inheritances will increase the lifetime income by just 5% for those with parents in the bottom fifth, compared to an increase of around 29% for those with parents in the top fifth.
4. The anticipation of an inheritance seems to be having a consequence on today’s standards of living.
The percentage of people expecting an inheritance has risen from 72% of Baby Boomers to 81% of Millennials. The IFS suggests that those expecting an inheritance are more likely to spend their income rather than save it. Their modelling suggests that people in the bottom fifth born in the 1980s effectively spend 11% of their inheritance before they actually receive any of it. Meanwhile those in the top fifth are spending 33% in advance of receiving any inheritance.
5. The growth of inheritances means that policies that successfully redistribute them would have larger effects on inequality and social mobility for later-born generations.
While the IFS did not model the impact that any inheritance tax changes could have, it does give a highly theoretical example that equalising inheritances at their mean value could increase lifetime consumption for the bottom tenth by 17% and decrease it by around 5% for the top tenth. This could reduce the gap in lifetime consumption between those with the richest and poorest parents by over 40%.