Download Wealth Inequality - Joseph Rowntree Foundation

Income, wealth and the
lifecycle
Wealth inequality in Britain is very extreme - the top 10 per cent of the
population owns half of all wealth. Secondary analysis of the 1995/6 Family
Resources Survey, along with 40 in-depth interviews with families, sheds new
light on the relationship between income, wealth and different stages of the
lifecycle. It found:
In 1995/6, half of all families in Britain had total wealth of at least £53,000
(the sum of financial savings, accumulated state, occupational and personal
pension wealth and net housing wealth). Wealth increased with age,
peaking at an average (median) of £133,000 for 60- to 69-year-olds, then
declining for older groups.
Pensioner couples had the highest levels of wealth of all lifecycle groups,
followed by middle-aged couples without dependent children. Young single
people (under the age of 35) and lone parents had very little wealth.
Four factors were found to affect wealth accumulation. The most important
was ability to accumulate wealth - those with higher incomes and lower outgoings were most likely to put money into financial savings, mortgages and
occupational or personal pensions. Attitudes towards saving and knowledge
about different schemes also had an effect on wealth accumulation. Finally,
the availability of suitable savings and investment schemes was also a key
factor.
If state pension wealth is included in the definition of total wealth, about
half of total assets was derived from accumulated pension wealth in 1995/6.
But most (55 per cent) of this pension wealth came from the state pension.
Half of all lone parents, young single people and couples with young
children had no private pension wealth.
Housing wealth was a very important source of wealth (accounting for a
third of all wealth if state pension wealth is included in the total). Half of all
pensioner couples had housing wealth of at least £60,000 and half of all older
couples without dependent children had housing wealth of at least £49,000.
Financial savings represented only a minority (17 per cent) of all wealth, and
one-third of families had no financial savings at all.
JOSEPH
ROWNTREE
F O U N D AT I O N
JULY 1999
JULY 1999
Background
group but some pensioner couples were much better
Research into poverty and inequality typically
off in income terms, reflecting a degree of inequality
concentrates on income as a measure of economic
within this group. By contrast, in terms of wealth,
well-being, but ownership of wealth is also an
pensioners were generally quite wealthy, particularly,
important measure. The distribution of wealth is
as might be expected, in relation to pension wealth.
highly unequal - much more so than the distribution
Survey showed that income and wealth were very
Knowledge about and attitudes
towards wealth
closely related - those with a gross annual income of
As well as analysing the Family Resources Survey, the
less than £5,000 had median total wealth (including
research also involved in-depth interviews with 40
state pension wealth) of only about £3,000. Those
families at different stages of the lifecycle. These
on incomes of over £35,000 a year had median total
interviews showed that people have different levels of
wealth of about £110,000.
understanding about saving and investment. Those
of income. Analysis of the 1995/6 Family Resources
Income and wealth were found to be closely
with a sophisticated level of knowledge were most
related to different stages of the lifecycle. As we
likely to be middle-class, be actively saving and
might expect from lifecycle theory, young, single
working in an environment related to personal
people under the age of 35 were, on average, a very
finances. Those with an adequate or limited level of
poor group in terms of both income and wealth, but
knowledge felt less need of information and felt that
a minority were quite well-off, reflecting a high
they had enough for their current circumstances.
degree of inequality within the group. Young
Most people had very positive attitudes towards
childless couples under 35 were much better off than
saving. Those who were less positive were often in
their single counterparts. The trend towards having
an economic position which made saving very
children later in life, if at all, will mean that couples
difficult. Attitudes to saving were partly determined
in work will increasingly enjoy a financially fruitful
by lifecycle stage, but not entirely. Other factors,
time when incomes are high and out-goings are low.
such as social class, age, generation and personal
The arrival of children in a family brings extra
costs and, often, reduced income. Three factors
experience, were also important.
Based on the qualitative research, four factors
affected the relative prosperity of families with
were identified as affecting wealth accumulation.
children. First, the number of adults was crucial.
The most important was ability to accumulate wealth
Lone parents were one of the poorest lifecycle groups
- those with higher incomes and lower out-goings
in terms of both income and wealth. Second, the age
were most likely to put money into financial savings,
of the children was important. Poorer families were
mortgages and occupational or personal pensions.
more likely to be those with pre-school-age children
The ability to accumulate wealth also encouraged
(these families are more likely to be relying on one
people to find out more about different ways of
wage rather than two). Third, the age of the mother
saving and investing. It also promoted a positive
made a difference. In couples where women have
attitude towards building up assets. But attitudes and
delayed child-bearing to establish themselves in the
knowledge also had some independent effect on
labour market, the arrival of children appeared to
wealth accumulation. Finally, the availability of
have less of an impact on income and wealth.
suitable saving and investment schemes was
A group which fits uneasily into any lifecycle
important. For example, those with access to an
model is that of older single people between the ages
occupational pension or a 'Save as You Earn' scheme
of 35 and 64 who do not have dependent children
were more likely than others to build up assets.
living with them. This group had low levels of
In terms of running down wealth, most people
income and wealth on average and yet are rarely the
were keen to use up their financial assets during their
focus of research or policy discussion, which tends to
retirement and were not planning to leave substantial
concentrate more on young people, families with
amounts as bequests. But those who owned homes
children and pensioners.
hoped to pass these on to their children.
Pensioners were, generally, a very low-income
JULY 1999
Figure 1: Breakdown of wealth in Britain
Including state pension wealth
Private pension
22%
Excluding state pension wealth
Private pension
29%
State pension
26%
Housing
47%
Housing
35%
Financial
17%
Financial
24%
Source: 1995/6 Family Resources Survey
The importance of pension and
housing wealth
to £56,900 for pensioner couples. Half of all lone
The research concentrated on three types of wealth:
wealth at all. In the qualitative research, interviewees
financial savings, housing wealth, and pension
were very positive about home-ownership, although
wealth. It was clear from the analysis of the 1995/6
many were concerned about having a mortgage given
Family Resources Survey that housing and pension
worries about job insecurity and interest rates.
parents and young single people had no housing
wealth were by far the most important forms of
wealth (see Figure 1).
Pension wealth was closely linked to income, age
Incentives and disincentives to save
The research investigated the incentive and
and lifecycle stage. Some groups had very little
disincentive effects of the tax and social security
private pension wealth. For example, half of all lone
systems on asset accumulation. The qualitative
parents had no private (that is, occupational or
research revealed that few people understood how
personal) pension wealth at all and the same was true
the tax system treats different types of assets. There
for young single people and couples with young
was some vague awareness about the role of National
children.
Savings, TESSAs and PEPs but most people had very
In the qualitative research with 40 families, most
little money to save and they preferred to put what
of those interviewed thought that they were not
little they had into what they saw as more accessible
currently putting enough money into a private
bank and building society accounts.
pension. This was related to both income and
There was a general awareness of social security
lifecycle factors. For example, young people could
rules about savings, but those with most ability to
have afforded to put more money into private
save were least likely to need means-tested benefits
pensions but they wanted to spend and enjoy their
and so these rules provided little disincentive to
money and thought that there was plenty of time
save. There was a similarly general awareness about
before they retired. People with children felt that
the asset rules around long-term care but there was
they could not afford to pay more money into private
also no evidence that such awareness had much
pensions because of the financial demands of having
effect on behaviour. This was mainly because people
a family. Those whose children had grown up had
thought that they were highly unlikely to go into
more spare cash but felt that it was too late to make a
care. Respondents were nonetheless quick to
substantial contribution to their future pension.
condemn the social security and long-term care rules
Mean housing wealth was £31,700 and this rose
as penalising thrift.
JULY 1999
Ways of encouraging wealth
accumulation
A number of government initiatives seek to
encourage wealth accumulation. For example, cash
Individual Savings Accounts, introduced in April
1999, are tax-free and provide savers with easy access
to their money. Furthermore, there is no minimum
subscription. All of these components should attract
low-income savers. However, the maximum
subscription each year in the first year (in 1999) is
£3,000, which should attract high-income savers.
Thus while Individual Savings Accounts may
encourage those on low incomes to save, it is likely
that they will also provide a tax-free perk to highincome savers.
The Government's Green Paper on pension
reform (Partnership on Pensions, published in
December 1998) has targeted those on low and
middle incomes, but this research suggests that lack
of compulsion is unlikely to encourage people to save
sufficient amounts to provide them with the level of
income in retirement which they would like to have.
Issues relating to low-income savers have also
been highlighted by the Government's Social
Exclusion Unit, which recognised the role of access to
financial services for those on low incomes in the
report Bringing Britain together: A national strategy for
neighbourhood renewal.
Policies to help people run down their savings or
investments (particularly their housing wealth) in
later life could also be developed so that people can
benefit from their previous financial behaviour. This
issue has so far not been fully addressed by
government.
About the study
The Joseph Rowntree Foundation funded the Policy
Studies Institute to carry out this study as part of a
follow-up to the Foundation’s Inquiry into Income and
Wealth (published 1995). The study involved a
literature review, secondary analysis of the 1995/6
Family Resources Survey and 40 in-depth interviews in
1997 with families at different stages of the lifecycle.
How to get further information
A full report, Wealth in Britain: A lifecycle
perspective by Karen Rowlingson, Claire Whyley and
Tracey Warren, is published for the Joseph Rowntree
Foundation by the Policy Studies Institute (ISBN 0
85374 753 9, price £12.95. Full details about the
methods used to calculate income and assets are
contained in the report.