David Sturrock

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. 

IFS projects that, on average, inheritances will be worth nine per cent of household lifetime (non-inheritance) income for those born in the 1960s, rising to 16 per cent for those born in the 1980s.

This would mark a significant social change, meaning that people’s incomes and living standards are increasingly determined by what they receive from their parents rather than what they earn themselves:

• 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 two per cent, on average, for those with parents in the bottom fifth of the wealth distribution and by 17 per cent 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 five per cent, on average, for those with parents in the bottom fifth of the wealth distribution and by 29 per cent for those with parents in the top fifth.
• Consequently, inheritances are likely to be increasingly important in driving differences in living standards between those from different parental backgrounds. For those born in the 1960s, inheritances are projected to account for around a quarter of the inequality in living standards between those from different parental backgrounds. But for those born in the 1980s, this is projected to rise to a third.

This means the differences between older and younger generations that we see today are set to translate into reduced social mobility within younger generations in future.

Inheritances look set to make it increasingly hard for those with poor parents to move up the income distribution, as their smaller inheritances mean they have more ground to make up:

• For the 1960s-born whose parents are in the poorest fifth by wealth, we project that inheritances will increase the proportion who end up in the poorest fifth of lifetime incomes themselves from 38 per cent to 41 per cent.
• However, amongst those born in the 1980s, the equivalent rise is from 40 per cent to 48 per cent, meaning inheritances have an impact which is around twice as big.

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.”