The Institute for Fiscal Studies (IFS) has published a new report on likely future inheritances. It may give a future Chancellor something to consider
The Institute for Fiscal Studies (IFS) has regularly looked at inheritance and inequality. In its latest paper, it has gone into greater detail, drawing on data from a variety of sources:
We have summarised some of the key findings below:
Inheritances are likely to be larger compared with lifetime incomes for younger generations than for their predecessors.
The IFS measures inheritances as a proportion of lifetime income for the recipient. This metric provides a context for the impact on living standards. For those born in the 1980s, average inheritances compared to lifetime income are projected to be nearly double as much for those born in the 1960s.
Inheritances are set to be larger for those with higher incomes. However, inheritances as a percentage of lifetime income look likely to be similar, on average, for low-income and high-income households.
Among these born in the 1980s, the IFS projects that the median lifetime inheritance receipt as a percentage of lifetime income will be around 15% for households in the bottom fifth by lifetime income, similar to the 16% projected for the top fifth. In cash terms that translates to £150,000 and £390,000, respectively.
Inheritances are set to increase inequalities between those with richer and poorer parents.
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 IFS estimates that the inequality impact of inheritances based on the parental background will be larger for younger generations. For those born in the 1980s, inheritances are projected on average to increase lifetime incomes by 5% for those with parents in the bottom fifth of the wealth distribution. However. for those with parents in the top fifth, the increase is 29%.
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.
The IFS projects those born in the 1980s will on average hold 9% (or around £16,000) less wealth at the age of 45 if they anticipate a future inheritance. In other words, those expecting an inheritance are more willing to spend their income rather than save.
Those with higher incomes are more likely to reduce the amount they save in anticipation of inheriting. This means they will likely see a larger effect on their living standards today.
The IFS suggests that for those born in the 1980s, the bottom fifth of households effectively spend 11% of their inheritance in advance. For the top fifth this nearly triples to spending 33% in advance.
The growth of inheritances means policies that successfully redistribute them could reduce inequality and increase social mobility for later-born generations.
The IFS did not model the impact of any IHT changes to redistribute inheritances. However, it theorizes equalising inheritances at their mean value would increase lifetime consumption for the bottom tenth by 18%. For the top tenth, it could decrease consumption by 5%. This reduces the same gap in lifetime consumption between those with the richest and poorest parents by over 40%.