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08.05.2018

£10,000 Grants for 25 year-olds could Fix intergenerational Wealth Gap

It’s old news, by now, that today’s young people are finding it much more difficult to leap onto the housing ladder than previous generations. A report published by the Resolution Foundation (RF) today, however, reveals inequalities which run much deeper. The Foundation went on to suggest some dramatic policies which could overcome the problem, including proving every 25 year old with a £10,000 grant.

Distribution Issues

The UK is a wealthy nation, and whilst living standards have certainly improved overall in the past decades, skewed distribution remains a huge problem. According to the Office for National Statistics (ONS), the wealthiest 10% of people in the UK own a staggering 44% of the country’s total wealth, whilst the least wealthy 50% own only 9%. This huge disparity between rich and poor looks set to worsen if current trends persist – as wage growth stagnates, inheritance and parental help are set to be increasingly vital factors in determining millennials’ wealth levels. In other words, social mobility could be severely impaired.

Another RF study, released earlier this year, predicted that up to a third of this generation will never own a home, and continue renting into retirement. The finding suggest that inequalities exist between as well as within generations – these gaps were the main focus of the RF’s policy recommendations. Talking to the BBC about the results of the report, Lord Willetts, chairman of the RF, said that young people would likely become “increasingly angry” if nothing was done to address the intergenerational wealth gap. He added that the UK had “a very serious problem of ensuing there’s a fair deal across the generations”. The data in the RF report echoes Willetts’ concerns. For instance, the median income of pensioners is now higher than the median income of working-age people, after housing costs are taken into account. Additionally, despite millennials’ reputation for reckless spending, the report also revealed that today’s 25 – 34 year olds spend 15% less than their 55 – 64 year old counterparts.

Debt between Generations

Despite lower spending, many people in this age group are finding it impossible to make ends meet without credit. The Financial Conduct Authority (FCA) warned late last year that younger people were bearing the brunt of what it called the “consumer debt crisis”. Andrew Baily, head of the financial regulator, hastened to add that this was not due to “reckless” spending, but simply to fund “essential living”. Key reasons that young people turned to credit included, in Baily’s eyes, “high rental costs and lack of income growth”. Baily had a point – millennials are reportedly spending three times more of their income on housing than their grandparents. FCA data also showed that the number of people aged between 18 and 34 going through insolvency procedures leapt up by a third between 2015 and 2016 alone. Even worse, much of the debt accrued by people in this age range consists of short-term, high cost credit.

To tackle these issues, the FCA would like to see “more focus on what is sustainable, affordable credit provision”. This solution would certainly help users of this kind of credit, but clearly larger structural changes in income and rent control are required if we are to reduce young people’s dependence on credit.

Radical Suggestions

In order to redress the balance, the Resolution Foundation has some surprising ideas in mind.

  • £10,000 “Citizens’ Inheritance”

Firstly, the Foundation suggested that a £10,000 cash injection into the life of every 25 year old could have a huge impact on their futures. This grant, branded as a “citizens’ inheritance”, would be earmarked for either a deposit on a home, education or training, or pension savings. The grants would cost around £7 billion to provide, which would be raised by multiple tax reforms.

  • Replacing Council Tax System

One way in which this fund could be raised, the RF suggests, is by redesigning the current system of council tax, which many commentators believe is outdated and unfair. The RF proposed a system whereby property tax would target wealthier homeowners, rather than lumping homes with a wide range of values into single tax bands.

  • Changing Inheritance Tax

Changes to the way inheritance tax works could also help to fund the citizens’ inheritance policy. Over their lifetime, each UK citizen would be able to inherit £125,000 before tax kicked in, after which they would pay 20% on inheritances up to £500,000, and 30% on any payments beyond this. The RF estimate that this reform alone would raise £5 billion.

  • Half Stamp Duty for first time Buyers

To further assist young people who aspire to be homeowners, the RF suggests that stamp duty (the tax paid on property and land transactions above £125,000) could be cut in half for people buying their first home.

  • Ban Zero Hours Contracts

To help young people escape incomes which fluctuate problematically, the RF suggests that zero hours contracts should be replaced with guaranteed hours.

  • Increase Taxes for Wealthier Pensioners

Previous governments have been unable or reluctant to increase the amount of National Insurance paid by pensioners, but the RF believe that since this demographic is generally the most concerned with NHS care, they could help to fund a £2.3 million NHS investment. As Lord Willetts put it, “It so happens that the older people who will benefit most from extra healthcare spending have got some resources, so at low rate, it’s reasonable to expect them to contribute.

Some of these changes could be challenging to implement, but the RF believe that they could help young people prosper, and help to close the wealth gap.

If you need more information about the options available to you in dealing with your debt, you can always speak confidentially with one of our friendly advisors on 0808 2085 198.