Before the fall

This report is the fourth in our series of ‘audits’ of household wealth, offering the most comprehensive assessment of wealth inequality in Britain. It comes against a backdrop of an unprecedented mix of economic shocks and policy interventions during the Covid-19 pandemic and its aftermath, which have had profound effects on family finances.

Drawing on newly available data from the Wealth and Assets Survey (WAS) covering 2020-22, we provide a comprehensive analysis of the effects of the pandemic on household balance sheets. This new data reveals how the pandemic reinforced pre-existing patterns of wealth concentration and left some families exposed to the subsequent cost of living crisis triggered by the energy price spike following Russia’s invasion of Ukraine. However, because the WAS data is published with a significant lag, the most recent figures reflect a period before the fall in household wealth that occurred after March 2022. We also explore wealth mobility – or the extent to which people move up and down the distribution of wealth – in Britain, shedding new
light on the persistence of wealth inequality.

Britain’s wealth has expanded dramatically over recent decades, fuelled largely by periods of low interest rates and a sustained surge in asset prices. The latest data from the WAS show  hat this expansion continued during the pandemic, despite the economic turmoil, with household wealth reaching £17 trillion in 2020-22, of which £5.5 trillion (32 per cent) was held in  property and £8.2 trillion (48 per cent) in pensions. As a result, Britain’s wealth reached a new peak of nearly 7.5 times GDP by 2020-22, up from around three times GDP in the mid-1980s.  Yet, despite this remarkable increase in the overall stock of wealth, relative wealth inequality – measured by the share of wealth held by the richest households – has remained broadly  stable since the 1980s, with the richest tenth of households consistently owning around half of all wealth.

But stability in relative terms should not obscure the fact that, as the total value of wealth has grown, so too has the size of the gaps between the wealthy and the less wealthy. Numbers in Section 2 and Section 4 are in constant prices, and so we are not referring here simply to the effects of inflation, but to a growth in the real value of the differences between the wealthy and the less wealthy – what we call the absolute real wealth gaps. Absolute real wealth gaps continued to widen during the pandemic: the gap between average family wealth per adult in the top wealth decile and those in the middle (fifth decile) reached £1.3 million in 2020-22, up from £1.0 million in 2006-08. To put this into context, the average adult in Britain had just £168,000 in wealth in 2020-22. These larger wealth gaps, and the growth of wealth relative to incomes, mean that it is more difficult for those lower down to climb the wealth ladder through saving alone. For example, in 2006-08, the gap in average wealth per adult between the top and middle decile was equivalent to around 38 times typical full-time earnings. By 2020-22, this had risen to 52 times.

Indeed, between 2018-20 and 2020-22, passive gains (i.e. increases in asset prices) were more important than active saving in explaining the rise in household wealth, accounting for 60 per cent of the total rise in average family wealth. This helps concentrate wealth growth among those who already own assets, as nonowners gain nothing from rising asset prices.

These dynamics have reinforced inequalities between age groups. Older households, who are more likely to be asset owners, have benefited most from asset price inflation. Between 2018-20 and

2020-22, per-adult family wealth for people aged 50–54 rose by £35,000, the largest gain of any age group. By contrast, those in their late 30s saw only a £9,000 increase. Over the longer term, this has translated into a widening generational gap: the difference in typical wealth between those in their early 30s and early 60s more than doubled between 2006-08 and 2020-22, rising from £135,000 to £310,000 in real terms. These dynamics have resulted in older age groups disproportionately benefiting from Britain’s wealth boom: in 2020-22, those in their early 60s had nearly £150,000 more wealth in real terms than the typical person of the same age group in 2006-08. In contrast, the typical person in their early 30s in 2020-22 had just £8,000 more wealth than those of the same age in 2006-08.

Geography matters, too. Regional wealth divides remain stark, shaped by long-standing differences in house price growth and asset ownership. London, unsurprisingly, stands out as the most unequal region. In 2020-22, families at the 90th percentile of the wealth distribution in the capital held 12 times more wealth per adult than the median family. By contrast, the South East of England had the most even distribution of wealth on this measure, with the ratio of wealth between the 90th and 50th percentiles standing at 3.9. London also experienced the sharpest rise in inequality since 2006-08, driven by rapid house price growth in a region where property wealth is more unevenly distributed than anywhere else in Britain.

Overall, the stability of key measures of UK wealth inequality over recent decades masks a significant widening of absolute wealth gaps. These gains have flowed disproportionately to older, asset-rich households and homeowners in certain regions – particularly London. The result is a wealth landscape that is both highly unequal and harder to climb, as saving alone is no longer enough to shift a household’s position in the distribution.

The pandemic was an unprecedented economic shock. GDP fell by 9.7 per cent in 2020, and, at their lowest point, hours worked

fell by 20 per cent. But the impact on households was nothing like as dramatic as this. In part, this is thanks to government interventions – such as the furlough scheme, the support for self-employed and the additional spending on social security – that protected household incomes. But what is also relevant to households’ financial circumstances is that the lockdowns, travel restrictions, and social distancing measures at times severely curtailed spending opportunities. This unique set of conditions meant that, although some households struggled (particularly those who were made redundant or couldn’t access government support), many families were able to strengthen their balance sheets through higher saving and substantial debt repayments. Indeed, aggregate household saving rose to record levels, with the adjusted saving ratio reaching 25 per cent in Q2 2020, the highest on record. And financial resilience improved, on average, across the income distribution: even among families in the bottom income quintile, the proportion with £1,000 or more in bank accounts and other highly liquid savings products increased from 35 per cent in 2019-20 to 44 per cent in 2021-22.

Yet beneath this aggregate picture gains were not evenly shared, with higher-income families seeing much greater improvements in their balance sheets than low-to-middle income families. For example, the typical family in the lowest income quintile saw their liquid savings increase by just £80 over the pandemic period (2019-20 to 2021-22), broadly the same as the two years pre-pandemic. In contrast, the typical family in the highest income quintile saw their liquid savings increase by £4,200 – a much larger increase in savings than seen in the years prior to the pandemic.

But it wasn’t good news for everyone – some families did see a deterioration in their liquid savings. For example, 10 per cent of families in the bottom-income quintile saw their savings fall by £4,000 or more during the pandemic – twice the equivalent drop between 2017-18 and 2019-20. Large declines in liquid savings were broad-based across different family types, including single adults, couples, and families with children. Research undertaken at the time highlighted pandemic-related earnings losses as a key driver of this sort of deterioration.

On the other side of the balance sheet, many households took advantage of reduced spending needs to pay down unsecured debts such as credit cards and personal loans. Higher-income families were more likely to see large reductions in debt, with a quarter of families in the top two income quintiles reducing debt by £2,000 or more. Some families did see an increase in unsecured debt during the pandemic but rises were generally smaller than in non-crisis periods.

At the time of the pandemic, online surveys suggested that low-income households disproportionately turned to high-cost credit during the pandemic. But there is little evidence to support this in the new, much more comprehensive, WAS data. Nonetheless, the WAS does reveal a notable increase in the fraction of low-income families falling into arrears on their bills: between 2019-20 and 2021-22, 7 per cent of families in the bottom-income quintile who previously had no arrears fell behind on bills, while no comparable increase occurred among middle- or higher-income families.

Overall, despite the unprecedented economic pain inflicted by the pandemic, Britain’s household finances have come out in a stronger position than many feared. The improvements in savings and reductions in debt – particularly among middle-income households – provided an important cushion against the sharp rise in energy prices, food costs and mortgage rates that followed. But the uneven nature of these gains meant that some low-income families entered the cost of living crisis with worse balance sheets, leaving them particularly vulnerable when price pressures intensified.

The pandemic was a tumultuous time for household finances, but to truly understand how economic shocks affect family finances, it is necessary to track them over time. We have therefore provided the first comprehensive analysis of wealth mobility in Britain, following the same families over time to deepen our understanding of how persistent inequality arises and the forces that shape wealth in Britain.

We might be less worried about wealth inequality if there is also considerable wealth mobility. But our analysis shows that wealth mobility is limited. Having removed the impact of aging on wealth accumulation, the overwhelming majority of people move no more than one decile above or below their starting position over a four-year period. For example, between 2016-18 and 2020-22, 76 per cent of those on low-to-middle-incomes and 73 per cent of higher-income people moved by no more than one decile in the wealth distribution.

Overall mobility is similar across income groups, but the direction of mobility differs. Almost a half (45 per cent) of people from higher-income families moved up the wealth distribution at least one decile between 2016-18 and 2020-22, compared to only 40 per cent among their low-to-middle income counterparts.

Two trends help us understand why poorer families fare worse. First, as you might expect, for a given level of wealth, those from low-income families are less likely to climb the wealth ladder. Second, although all types of wealth matter for changes in upward relative wealth mobility, pension and housing wealth play a particularly large role, and these types of wealth, particularly pension wealth, account for a larger share of higher-income families’ wealth portfolios than they do for lower-income families. For example, among 40–44-year-olds in 2016-18, pensions accounted for 36 per cent of total wealth in higher-income families, compared with 31 per cent in lower-to-middle income families.

Major life events play an important role in moving people up or down the wealth distribution. For example, becoming a homeowner – which is far more common among those from higher-income families (7 per cent versus 4 per cent for lower-income families between 2016-18 and 2018-20) – is associated with a large rise up the distribution among higher-income households (on average, this moves people nine points up the within-age-group wealth rank, where rank is measured from 1 (least wealthy) to 100 (most wealthy)). This reflects the transfers received by family members around the time of buying a home,

rather than the direct impact of changing tenure status; in particular, someone in the top fifth of their age group’s wealth distribution is twice as likely to receive a financial gift than someone in the bottom fifth, at 8 per cent versus 4 per cent.

We also find that moves into employment boost wealth, particularly for low-to-middle income families. Among individuals in this group, moving from non-employment to employment between 2016–18 and 2018–20 raised their within-age-group wealth rank by an average of eight points by 2020–22, and additional household members entering work contributed a further eight point increase in the within-age-group wealth rank. Finally, among individuals in low-to-middle income families who report a new a long-term health condition between 2016–18 and 2018–20, average wealth declines by five points in the within-age-group wealth rank by 2020–22, whereas an equivalent change among their higher income counterparts has a negligible effect on mobility. But people from low-to-middle income families are less likely to experience most of these wealth-enhancing events.

Overall, the findings underline that Britain continues to exhibit high and persistent wealth inequality, with limited mobility. Addressing this will require policy focused not only on incomes, but on expanding asset ownership (notably access to secure, affordable homeownership) and strengthening opportunities for accumulation over the life course –particularly via adequate and inclusive pension saving.