How to bridge the wealth gap between the young and the old

Old woman given cash to a child © Getty Images
A handout from granny isn’t going to cut it

Does it bother you that the UK is riven with generational wealth inequality – that old people are much richer than young people? Maybe it should.

After all, Office for National Statistics numbers show us very clearly that the over-65s hold much more of the UK’s wealth than any other group. Just over 50% of those aged 55 to 65 have household wealth of more than £500,000. A mere 12% of those aged 25 to 34 have amassed the same level. But if it does bother you, what exactly do you propose should be done about it?

It seems obvious that the elderly should have piles more cash stashed away than the young. They have had more time to develop the skills that bring high income, more time to borrow and let inflation help them pay back their debts; more time to save and invest; and of course more time to inherit.

Imagine a system where everyone of whatever age or skill level was paid £50,000 a year for whatever job they did. No exceptions. Would this get rid of intergenerational wealth inequality? No. Over time, people would still be able to save and to benefit from the miracles of compounding and inflation. Older people would still be richer. The only way to make it work would be to insist that everyone started out with a high salary and then to cut it as they aged. That would stop this accumulation business in its tracks. It would also be nuts.

Look at it this way, and you can see that it is the natural order of things that the young should be poor and the old should be rich. Perfectly reasonable in a functioning capitalist society.

That doesn’t mean we don’t have a problem. We do, because the wealth gap is widening. Various studies have shown, in the words of the Bank for International Settlements, that extreme monetary policy “may have added to inequality to the extent that it has boosted equity prices”.

I don’t think we need the word “may” there. Monetary policy has had a huge effect on the price of all assets – and in the UK, the price rise causing the most pain is that of property. We know that very low interest rates in the UK have had a major impact on households. The result is that what was once a natural level of inequality is now a scarily large one, and one that we are constantly told we must address if the young are ever to have a chance of home ownership or prosperous old age.

But the point is that no one takes their mortgage-free house or their Isa to the grave with them. They give it away before they die or it falls, mostly free of inheritance tax, into the waiting hands of their offspring when they do.

Royal London tells us that about four million of the 17 million people currently aged 25-44 will inherit cash from their grandparents (to the tune of £400bn, apparently). Furthermore, two in five have already had lump sums from grandparents, and 50% have accepted lump sums from their parents.

We also know that much of this money goes directly into the housing market: Legal & General reckons that “Bomad” (the Bank of Mum and Dad) will help fund more than a quarter of all house purchases in the UK this year. This will cost parents £6.5bn and – on the basis of cash handed out – make them the equivalent of the ninth-largest mortgage lender in the UK. Only 50% of the cash is loaned – the rest is gifted – and the average handout comes to £24,000. How’s that for a wealth cascade?

If you have adult children and you haven’t yet given them anything towards housing you might be feeling a bit guilty by now. So what if you want to do your bit to ease wealth inequalities (and relations) between the generations?

The obvious first step is to see what you can afford. The greatest gift most parents can give their children is their own financial security: but they might thank you less for funding their flat deposit if you later run out of money and ask to move in.

The second is to recognise that you can’t take back gifts once given (not even if your daughter marries a man you despise and he wants half the flat when they get divorced to fund a globetrotting surf trip) and that loans to family members to buy houses often turn out to be gifts.

To avoid the latter you must write a firm and detailed loan agreement. But even that won’t necessarily be enough. Houses are nothing if not illiquid (only a small percentage of the houses on the market sell in any one month) so you can’t ever get your money back in a hurry.

It is also worth remembering that unless your name is actually on the title, you have no security: you won’t be in line for anything should the house be repossessed. All this is tricky for modern parents: according to a survey from Prudential, 75% of the over-55s want to hang on to some control over the money that goes to their children. Best perhaps to forget loans and to simply work out what you can afford to “give and forget”.

Alternatively, you could sit back, book a cruise and forget the whole thing. Average house prices are falling (down two months in a row on Nationwide’s numbers) and that’s a good thing. Shifting cash around inside individual families is a very inefficient way for property inequality to be sorted out. It doesn’t benefit everyone equally and it involves a potentially toxic mix of admin and family negotiation.

A much better way for this to happen is for house prices to come down to their historical average relative to wages. Older people will then have houses that are worth less (which will make no difference at all to them) but young people will be able to afford to buy houses (which will make a huge difference to them). That, I think, is the kind of simple and mostly painless wealth transfer we should all be rooting for.

• This article was first published in the Financial Times

  • rory

    I agree entirely, and it might happen…when pigs fly.

  • Triple H

    So how exactly can an interest rate of 5% help the younger generations buy a house? What you are suggesting is that the younger generations looking to buy a property should pay out more towards interest rather than an actual asset, i.e. a property. Suppose a young couple is looking to finance a house and their repayments come out to 1000/month based on a rate of 1.5%. Now suppose the rates rise to 5% but the property price drops. Do you think the property price will drop to a level where the repayments remain at 1000/month? Even if they do (and there is going to be carnage in the society if it does), the amount being paid out is still going to be the same while the said couple is only going to be enriching the ‘banker’ and the cash rich while this couple will probably lose their jobs in the crash following such a massive devaluation of assets. I suppose it explains who’s side you are on!
    Also, how is paying out 5% to grandpa and grandma on their stashed cash going to help the young earn more or to be more ‘equal’ to them financially?

    This is frankly a nuts article and goes to show why people are turning away from the mainstream and giving anyone their ear who is *not* from the same old, rusty and crooked system even if they don’t completely understand what the problem really is.

    • rory

      Where exactly does it say in this article that the solution is to ‘tank’ house prices by increasing interest rates to 5%? – it doesn’t! I agree with MSW that prices do need to come down and I also agree with you that there would be a massive economic fall out from an uncontrolled house price crash, however there is a simple solution – tax the profits! i.e. Remove CGT relief from all property. The people who will pay will have made the money to do so comfortably, interest rates can be maintained as required by the economy in general, and once the message gets out that property is no longer a tax free, one way bet, house prices will find a new (lower) level. Throw in VAT on new-builds and the Government would have a massive new income stream to build more social housing, thereby stimulating the economy… as I said ‘ when pigs fly’.

      • Triple H

        Not in this article but you don’t have to look hard to find MSW proselytizing rates around that mark. Low rates are not the problem. London property is expensive because there is no space and it is a much loved destination for people looking to find meaningful work. As long as there are no other places in the UK that can come close to London in offering jobs for the new economy, you will have this pressure on London property. Let’s not try to kill the few globally attractive places like London by hammering people who live here and burying them in interest heavy debt.
        Although I do not own property, I do not think it is fair for people to pay CGT when they move into a bigger home (due to having kids for instance). CGT on multiple/business properties should be fine but we know that Moneyweek and their chums in big business would hate it and is never proposed (i.e. taxation on institutional property landlords).

      • Prices won’t come down so long as we have “help to buy”, funneling more and more money into the housing market. The only way to redistribute housing equity is some kind of taxation on property assets. I favour a Land Value Tax, which should stop the UK turning into a giant game of Monopoly.

      • marylyn ford

        No one would be able to up size or downsize! Better to allow anyone who can afford rent, to have interest only mortgages, including benefit claimants, until they can afford to start paying bits off. That way buy to letters would find something more productive to do with their money, and social housing would go to the vulnerable. Obviously bad behaviour causing complaints from the neighbours, or a lack of maintenance, would lose you the mortgage, which would pass to a body charging rent.

        • rory

          You guys really don’t get it !!! Most people won’t pay any CGT because house prices will stabilise and cease to generate significant capital gains just by existing. However speculators etc who do manage to make gains will pay tax on their profits just like any other business. Problem is that people are utter hypocrites; they don’t really want a house just to live in – they want a house just to live in and to sell for 3x what they paid for it, mainly because they are too stupid to realise that the gain is meaningless unless they own two.

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  • There are ways of protecting money given through loans. We have “given” money under a “repayable on demand” clause, which will probably never be invoked but means someone else can’t snaffle their assets if push comes to shove. We have also lent money to buy property with an agreement stating we have “first legal charge” on the property, like a mortgage. In Scotland it was a bit more complicated with a “Standard Security” drawn up by a solicitor, but still easily done, and means that no unsecured creditor can claim their flat as an asset.

    But these are legally loans not gifts. The intention is after a few years, when the loan part is repaid, to tear up the “repayable on demand” agreement and they can keep the money. Otherwise it would be considered as an asset of ours.

  • DiverPhil

    I wonder how long the low interest rates will remain if brexit continues on the hard course and our ability to support our borrowing is perceived to be reduced by Mr Carney’s kind strangers, will bond rates increase forcing interest rate rises despite the BoE actions. I bought my first place at a mortgage rate of 7.5% which went up to 14.75% during John Majors ERM debacle in the 90’s this was followed by a recession, lots of repossessions 25% reduction in house values in London. I hope history doesn’t repeat itself but it might echo and cause a market correction, the younger buyers will have time on their side to weather these market fluctuations, others with a shorter timeline or excessively leveraged might not.

  • A Frith

    House prices are not actually astronomical outside the London area. I tend to think the housing crisis is being caused by the unavailability of credit for younger people.
    My generation did not have to find 30% deposits. None of us would have bought a home otherwise. We got 100% mortgages, with fees included. Albeit at 8%.
    That’s why we are a wealthy generation 30 years later.
    The present credit restrictions are stupid. The vast majority of young couples with children will not default on their mortgages, no matter how tight money gets.

    • marylyn ford

      You are absolutely right, and I would prevent house builders from selling the freehold separately. Also, none of this requires armies of civil servants, or any extra taxes on anyone or anything.

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  • Banst

    “So how exactly can an interest rate of 5% help the younger generations buy a house?” You assume that every young buyer is an irresponsible purchaser who wants to purchase at 18 or so with 100% (or as near to 100% as possible) mortgage. For such buyers if rates rise and prices fall the overall mortgage repayment stays the same – hence no benefit for the House price Crash. BUT NOT ALL BUYERS ARE LIKE THIS!!! A sensible buyer might have been saving for 10 years for about 30% deposit. Should house prices correct by 50% HURAGH!!! They now have a 60% deposit. Even more sensible and cautions buyers might insist on saving money and buying for cash once saved enough money. If interest rate goes to 5% and house prices half they benefit twice: the amount they have to save is halved AND when saving they get a reasonable interest and hence can save much quicker.

    • marylyn ford

      Not if they bought the year before!

      • Banst

        The question was how it helps youngsters TO BUY a house not to make speculative profit on property they bought a year ago. If they bought a year ago if the were sensible they should still be able to withstand a 5% rise to interest rates. In fact given that rates have been as high as 15% within a generation or so anyone who took a mortgage that they would not be bale to repay at 15% interest is grossly irresponsible….. And as far as price collapse is concerned any objection from existing owners is driven by envy and jealousy. After all if when they bought it they though the house is well worth 400k why should they be bothered if in two years it is worth 200k (unless they plan to sell it and not to buy another one – i.e. immigrating)?

        • marylyn ford

          You have missed the point by a million miles, if rates suddenly went up to 5%, the property price would drop a lot, so the young who bought last year would not only have lost a big chunk of the equity in their home, they would also be paying more than twice as much for it. I think you meant emigrating , in your final sentence.