What’s the secret to building wealth? It helps to have wealthy parents.
New research by the Institute for Fiscal Studies (IFS) looks at the impact that wealthier parents have on transferring economic advantages to their children.
The headline finding might come as little surprise; young adults with wealthy parents are, on average, six times as rich themselves when compared to those who come from the poorest UK families.
The IFS discovered that, by the time young adults are in their 30s, those with parents in the wealthiest fifth of their generation had an average net wealth of £107,000.
Compare that to those in their 30s with parents in the poorest fifth, who had an average wealth of £18,000.
When analysing the figures, the IFS excluded pension wealth from their calculations.
We might conclude from this study that there is a strong correlation between the wealth of young adults and their parents’ level of wealth.
When the IFS looked at young adults whose parents had the same earnings and education levels, those with the wealthiest parents tended to earn more.
From a behavioural perspective, people with wealthier parents also tend to save more money as a proportion of their earnings.
Children of wealthier parents received more money from their parents, saving more of their earnings.
The research also shows that young adults with wealthier parents are more likely to hold higher-risk, higher-return investments, including stocks and shares.
Another interesting finding in this research was the ability for the children of wealthy parents to get onto the property ladder. Read more of the report here.
65% of people with parents in the top third of UK wealth distribution become homeowners by their 30th birthday.
For young adults with parents in the middle third of the wealth distribution, 56% become homeowners by 30, and the proportion falls to 41% for young adults with parents in the bottom third of wealth distribution.
David Sturrock, a senior research economist and author of the report, said:
“Policies that seek to improve educational progression and labour market outcomes for those with low education and low income parents could, if designed and implemented well, be important for wealth mobility but would not on their own equalise wealth outcomes between those with wealthier and poorer parents.
“A significant amount of the inequalities in wealth by parental background appear to be due to other channels through which parents transmit advantages to their children.”
Sarah Pennells, Consumer Finance Specialist at Royal London, said
“These figures are very revealing, but they miss a trick by excluding pension wealth. Research shows that people with wealthier parents also tend to earn more and therefore save more as a portion of their earnings for later life, so the overall value of the ‘wealthy parent bonus’ could be even higher.”
Read more about how over-65s are sitting on £1.2 trillion of property wealth