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«September 2007 International Longevity Centre - UK The International Longevity Centre - UK (ILCUK) is an independent, non-partisan ...»

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More generally, the wealth transfers that have occurred create acute dilemmas for Government in developing public policy. Can older cohorts expect to rely on the young to pay for them in retirement and, more generally, the costs of an ageing population? If not, how can the Government create greater awareness that older cohorts will have to use their housing wealth to fund retirement? But, if the Government encourages society to see property as an investment in this way, does this risk exacerbating the same tendencies that have created the current predicament? Finally, evidence indicating increasing wealth transfers downwards within families represents an important new trend. Researching, understanding and responding to these wealth transfers remains an important task going forward.


Over their lifetimes, individuals possess numerous different types of assets and ‘negativeassets’, i.e., debt. An asset’s ‘liquidity’ refers to how easily it can be converted into cash.

Liquid assets comprise money in deposit accounts or investment vehicles, as well as negative liquid assets, such as credit card debt or personal loans. Illiquid assets include property and mortgage debt.

At different stages of the life course, individuals can be expected to have very different levels of assets and debt. For example, younger age groups might be expected to have loans to pay for university education or mortgages on their first homes. At retirement, individuals might be expected to have little or no loans, but to have accumulated assets after they or a partner has been active for many years in the labour market.

A Life Course Analysis of Asset Accumulation

The ‘Life Course’ approach to asset accumulation that has most influenced economics and other academic fields is the ‘Life-Cycle Hypothesis of Consumption’ 5. It argues that households will seek to ‘smooth-out’ their consumption in the context of - potentially large variations in their household income during their life. It argues that over the life course, households will accumulate assets when income is high, in anticipation of reducing assets in retirement when income is low, in order that their level of consumption is not forced to fluctuate in line with life-stage variations in income.

The ‘Life-Cycle Hypothesis of Consumption’ has been subject to much debate and research, and inevitably, numerous qualifications can be conceived. In particular, households are still likely to undertake precautionary saving in old age, not least because individuals approaching the end of life simply do not know how long they will continue to need an income.

Nevertheless the Life-Cycle Hypothesis of Consumption has strong intuitive force, and should hold true in most cases 6. Indeed, it is the assumption that individuals will want and need to smooth-out consumption across the life course that underpins the design of pension systems and various financial products.

Life Course Analysis of Asset Accumulation in UK Public Policy

In recent years, a life course approach to ‘asset accumulation’ has taken centre-stage in UK political debate, as policymakers have devoted significant attention to the reform of the UK’s private and public pension systems, and the need to ensure adequate saving to meet expectations of retirement income. The Pension Commission made a number of recommendations in 2005, many of which have subsequently been taken forward by the UK Government.

However, simultaneous to UK pension reform, enormous changes have taken place in patterns of non-pension wealth and asset holdings by UK citizens. How the Government, financial industry and citizens themselves respond to these changes in non-pension accumulation will have enormous bearing not only on today’s savers and retirees, but on those retiring decades from now. Many of these changes are without precedent, create new challenges, and require debate and reflection by all stakeholders.

The Life-Cycle Hypothesis of Consumption is usually credited to Franco Modigliani (1986).

For example, an academic study by Disney R et al. (1998) of UK households around the early 1990s found that financial and savings behaviour was broadly in line with what the Life-Cycle Hypothesis of Consumption would predict.

For these reasons, the ILC-UK undertook research exploring non-pension household assets in the UK, and how patterns of asset accumulation over the life course among different cohorts are changing. The resulting research is called Asset Accumulation across the Life Course 7.

The Research

The Asset Accumulation across the Life Course research analysed data from the British Household Panel Survey (BHPS). The BHPS is a longitudinal panel survey that has been carried out annually since 1991. The BHPS is household-based, and covers the entire agerange from 16 years upwards. The research involved cross-sectional analysis of the data from Waves 5, 10 and 15 of the BHPS when detailed questions on wealth, assets and debt were included. These Waves relate to the years 1995, 2000 and 2005 respectively. The sample size of the BHPS is around 10,000 individuals 8.

The Average Household across the Life Course

The Asset Accumulation across the Life Course research focuses on an individual’s net nonpension ‘household wealth’ at different ages. ‘Net non-pension’ wealth simply refers to the balance of total net liquid assets plus total net illiquid assets, excluding any pension wealth.

However, during the life course, an individual’s ‘household’ will change in composition, i.e., partnership status, number of children, etc. For example, in their 20s, individuals might be single and sharing rented accommodation. In this situation, an individual’s ‘household’ comprises just them. Subsequently, an individual may form a partnership. In this case, an individual’s household includes their partner. In subsequent years, if an individual has children, they will also form part of an individual’s household. In later life, it can be anticipated that children will leave home, and an individual’s household might once again comprise an individual and their partner.

Clearly, the composition of an individual’s ‘household’ may vary significantly over the life course, and household composition will also affect household assets, income, spending and saving. However, for Asset Accumulation across the Life Course, changes in household composition across the life course do not impact significantly upon the use and interpretation of the research findings.

This is because the Asset Accumulation across the Life Course research analyses the period 1995-2005. In this period, the average composition of households for individuals in different age-groups has not changed significantly, despite long-term trends of later marriage and fewer children. For example, the composition of an average 40-year old individual’s household in 1995 was not significantly different to a 40-year old individual’s household in

2005. This means that we can make reasonable comparisons of changes to average household wealth in the period 1995-2005 for individuals - referred to in the BHPS as ‘household representative persons (HRP) - at different stages of the life course.

See Boreham R and Lloyd J (2007).

For more information see http://www.iser.essex.ac.uk/ulsc/bhps

Asset Accumulation across the Life Course:

The Findings The main findings of the Asset Accumulation across the Life Course research are summarised below. Analysis for this research was undertaken by Richard Boreham of the National Centre for Social Research. The research used the consumer price index to adjust all figures for inflation, making all amounts equivalent to 2005. All the amounts used have then been rounded off. Detailed figures and analysis can be found in the original research report.

Liquid Assets

This part of the analysis explored changes in total liquid assets, which comprise savings, cash and investments 9. In the 25-55 years age-range, there has been a consistent pattern across the period of a steady accumulation of assets, reaching around £20,000 of household liquid assets for individuals aged 55 in 2005.

Cohorts aged 60-70 have seen household liquid assets slightly above this trend; individuals aged around 70 in 2005 had household liquid assets of around £40,000. The oldest cohorts saw lower levels of liquid assets, but with no consistent pattern of increases or decreases in retirement.

Liquid Debt

Liquid debt can be a loan, a credit card or some other form of personal debt. Volumes of household liquid debt have increased over the period in question for everyone aged 60 or below in 2005. The biggest increases have been among the youngest groups. Those aged over-65 in 2005 had mostly seen their household liquid debt reduce during the period, with those in retirement typically having less than £1000 in liquid debt.

Net Liquid Assets Adding together liquid assets and liquid debt gives a picture of the net liquid assets of households at different stages of the life course. The picture that emerges is complex.

Liquid Assets included in the BHPS are savings accounts, ISAs, National Savings Certificates, Premium Bonds, Unit Trusts, PEPs, Shares, National Savings Bonds and other investments.

–  –  –

Among younger age groups, net liquid assets are low. Even at the age of 50, individuals typically have net household liquid assets of only £11,000. In 1995, an equivalent 50-year old had net liquid assets of around £20,000.

The picture among older cohorts is particularly complex. Those aged 65-70 years have seen larger increases in their net liquid wealth over the period. Individuals in the oldest age groups have seen their household liquid wealth both increase and decrease over the period, although the overall change for any of these cohorts is not more than £10,000.

Illiquid Assets: Property Ownership

The proportion of households in different age groups owning a property has remained largely the same during the period 1995-2005. It is around 70% in the 30-39 age group, and remains at a plateau of around 80% from ages 40-65 10. Among older cohorts, the proportion of households owning property within each cohort is less than 80%, and declines with each successive cohort to around 60% among those over-75 11.

The number of households owning a second property has also seen little change over the period 1995-2005. The peak age-group for owning a second property was consistently 50-59, at a rate of 15% of all households in 2005.

The average value of property assets has increased across all age-groups for all cohorts.

However, as described, the percentage of households owning a property across any cohort is never more than 80%. By analysing only those households that own a property, and setting aside those renting or in social housing within all cohorts, the change in the value of property assets becomes much clearer.

The wide-age bands used in this analysis may mask small marginal increases in the average age of a first-time buyer. Detailed

on information on this for the period 1995-2005 can be obtained from the website of the Council of Mortgage Lenders:

www.cml.org.uk Analysis showed that among those in the 16-24 age group in the BHPS sample, an decreasing proportion lived in a household with a ‘household representative person’ aged 16-24 in the period 1995-2005, suggesting that a growing proportion of those in this age group continue to live with parents.

Among property owners, those aged 30-39 in 2005 had total household property assets of around £190,000; ten years previously, property owners in this cohort had household property assets of £57,000. The cohort with the most valuable household property assets in 2005 were aged 55-64, with property assets worth on average around £240,000; an increase of around £98,000 for this cohort from a decade before. Individuals just above and below this cohort saw similar increases.

Illiquid Debt: Mortgages

As with trends in property wealth, the changes in average household mortgage debt over the period are most clear when analysis is limited to only those households with a mortgage.

Among younger and middle-aged cohorts, there has been an increase in the value of

household mortgage debt:

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