Growing size of inheritances ‘curbing social mobility for younger generations’

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, according to an economic think tank.

Inheritances have been growing as a share of national income in the UK since the 1970s, the Institute for Fiscal Studies (IFS) said.

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.

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.

For people born in the 1980s, average inheritances compared to lifetime income are projected to be nearly twice as large as for the generation born in the 1960s.

On average, inheritances will be worth the equivalent of 9% of household lifetime non-inheritance income for those born in the 1960s, rising to 16% for people inheriting wealth who were born in the 1980s, according to IFS projections.

For people born in the 1960s whose parents were in the top fifth in terms of the distribution of wealth, inheritances were projected to increase their lifetime incomes by 17%.

But for those whose parents were in the bottom fifth, inheritances were expected to add 2% to their lifetime incomes on average.

The disparity was even more pronounced for people born in the 1980s.

For those with parents in the top fifth in terms of wealth, inheritances were projected to add 29% to their lifetime incomes.

But for those whose parents were in the bottom fifth, inheritances were expected to add 5% to their lifetime incomes on average.

The research also found people are increasingly relying on inheritances to fund their retirement.

The percentage of people expecting to receive an inheritance has grown from 72% of people born in the 1960s to 81% of those born in the 1980s.

When they were in their late 30s, 24% of those born in the 1960s expected to use a future inheritance as a source of retirement funding, rising to 27% of those born in the 1970s, the IFS said.

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.

“More broadly, 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.”