Serious Money

November 1, 2013 7:22 pm

The meek will not inherit a worry-free retirement

Handing down the UK’s property wealth will not solve retirement problems

John Lanchester’s Capital is a novel of our times. It tells the story of the diverse residents of a southwest London street in 2007, none of whom can quite believe how much their houses are now worth.

One resident, an elderly lady, dies of a brain tumour. At the funeral, her daughter’s mind starts to wander: “What I’m thinking is, my mum’s dead – and I’m rich.”

I suspect many people have thought such guilty thoughts. But could inheritance hold the key to solving the UK’s retirement savings problem? At first glance, quite possibly. The numbers are huge. Some data analysis released this week by the Office for National Statistics stated that in 2008-10, inheritances totalled £75bn – that is the same as the second instalment of the Bank of England’s quantitative easing programme.

And courtesy of rising house prices, there should be plenty more where that came from. Based on government figures for housing tenure and ONS’s house price data, the UK’s private-sector owner-occupied housing stock is worth more than £4tn. Almost half of this is already owned outright (ie, there is no mortgage on it) and it is a fair bet that the bulk of those properties are owned by older people, who bought houses when they were cheaper relative to earnings and have had much longer to clear their mortgages.

So that is it. We just need old folk to do the right thing, surrender their castles to the squeezed middle just below them, who will then sell them on to first-time buyers and young families. Our housing and retirement problems will be solved within a decade!

But it is not that simple. Inheriting property is actually not that common. The ONS data suggest that just under 20 per cent inherited property. Far more people inherited small amounts of cash and personal effects, and most bequests were small – half of inheritors got £10,000 or less. That is certainly nice to have, but not life-changing in the context of retirement provision.

Perhaps unsurprisingly, those most likely to inherit are those who least need to. The ONS found that those already living in the wealthiest fifth of households and working in managerial occupations stood a greater chance of inheriting. Those working in “routine” occupations and those whose parents rented their main residence were less likely to inherit. So inheritances are not going to fix the retirement problem for the less well-off. They may just mean nicer retirements for the already comfortable.

There are other reasons not to put too much store in a windfall. We are living longer, but getting old can be ruinously expensive. Estates may be run down to pay for social care, and even if they are not, increased longevity and later child-rearing means that people who might once have come into money in their 40s or 50s may now be well into their 60s before they do so.

Older people may choose to spend or give money away while still alive, funding grandchildren’s education or housing deposits. Bequests are often split between many family members. And wills can contain surprises, such as leaving the whole lot to the local cat sanctuary. Disputes involving wills have risen sharply since the financial crisis, partly because divorce is on the increase among older people.

Middle-aged Britons are so downbeat about money

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According to a new study from fund managers BlackRock, people aged 45 to 54 are the most negative about their financial future and the least confident about their ability to control their finances, pay for their children’s education or make the right decisions about investments.

Then there is tax, which is currently fairly light. For all the opprobrium it generates, inheritance tax is paid by very few estates, raises relatively little and is quite easy to avoid. According to HM Revenue & Customs, just 3 per cent of estates paid IHT in 2010/11. By 2012/13, IHT receipts were £3.15bn, less than the amount raised by duty on wine. So there is plenty of scope to grow, either by keeping the nil-rate band frozen (the Treasury is already doing this; it is stuck at £325,000 until at least 2018), by fiddling with the exemptions, or by raising the rate of duty.

You can argue about the morals of inheritance tax; personally I feel that it is a reasonable way of making up for a very unsatisfactory property tax system. But it seems certain that it will go up, by hook or crook. The dead do not vote.

Inheriting money is not a panacea, then. Fortunately, though, few people seemed to expect that it would be. In a recent BlackRock survey, just 10 per cent of middle-aged respondents said they expected an inheritance to be their main source of retirement funding. That is consistent with a 2005 study from the Joseph Rowntree Foundation, which found that only 14 per cent of people expected to receive an inheritance. The problem of inadequate saving for retirement will have to be solved by the living rather than the dead.

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