In our article on the average net worth by age in the UK, we looked at the broad shape of household wealth across a lifetime. Younger households usually start with less, wealth often rises through working life, and later it’s drawn on in retirement.
Learn more: Average net worth by age in the UK: how do you… | Charles Stanley
It was also clear that two households lived in by people the same age could have completely different net worths. Why? Because one simply owned assets that had been building for years, and the other didn’t. That raises a follow-up question for today: how wide is Britain’s wealth gap, why does it open up, and what can people do to address it in their own lives?
What is wealth inequality?
Wealth inequality is the uneven distribution of assets across households. It’s related to income inequality, as we’ll discuss, but the two aren’t the same.
| Income | Wealth |
| The money coming in, from work, pensions, benefits, rent, dividends and interest. | What you own once debts are taken off, such as property, businesses, pensions, savings and investments. |
Someone can have a good income but low wealth if their money is absorbed by rent, bills, debt repayments and family costs. Someone else may have a lower income but high wealth because they own a home outright, have a strong pension and a portfolio of investments.
Finding the right balance is really important.
Can you afford to dine out at that new place that’s just opened? Can you meet the water bill next month if it’s getting hotter for summer and you need to water the garden more? These are mostly income questions.
Can you help your child with a house deposit? Can you retire when you really want to? This requires a sense of security and long-term prosperity that can only come from wealth.
How unequal is wealth in the UK?
The latest available stats from the Office for National Statistics (ONS) show a very large gap.
In April 2020 to March 2022, the wealthiest 10% of households had total wealth of £1.25mn or more. The least wealthy 10% had £16,500 or less. That’s an astonishing skew.
The wealthiest 1% held the same share of household wealth as the least wealthy 50% combined. And what is especially telling is what that wealth is made of.
If you ask someone at the lights what they did to afford that Rolls Royce or Ferrari, they would likely give out short answers – “started an engineering business”, “real estate”, or “fund manager.” At the very top, wealth usually comes from one source. These are exceptional cases of concentrated ownership in a successful business, a real estate empire, or some other holding with value that has exponentially blown up.
This article isn’t about this rare type of headline-grabbing wealth. It’s about the practical steps to make a comfortable life for yourself, by buying assets that have time to grow.
Why does the wealth gap open up?
For most of the wealthy, three kinds of assets do most of the heavy lifting:
- A home: gaining value while the mortgage is gradually repaid.
- A pension: growing through contributions and compounding investment returns.
- Savings and investments: growing through interest, dividends and rising asset prices.
Those that own these assets have money working for them in their sleep. Having money in long-term growth assets like the property or financial markets means that as the wider economy grows, in theory, so does their personal wealth. Households that don’t have these assets are often relying mainly on income, which simply maintains their status quo (paying rent, bills, childcare and other essentials). Circumstances matter here enormously. But it’s also why building even modest assets, where possible, can make such a difference.
Property
A home does two jobs. It gives you somewhere to live, and it often forms the bedrock of your wealth. This is mainly because while most of it’s owned by your mortgage lender to begin with, more and more of its growing value becomes your own as you pay that mortgage down.
Over the long period of time this takes, most homeowners benefit from rising house prices. Imagine working hard to fully pay off a £200,000 mortgage over 20 years. Great work, because after 20 years, the home could be worth £500,000. This has been an especially powerful wealth driver for older generations who were investing in property when it was much cheaper relative to earnings. The gains have been best in areas where prices rose sharply, like London.
For people trying to buy today, the barrier feels higher. A deposit, access to a loan and enough stable income to pay the mortgage are all required. Until young people advance in their careers to reach that milestone, renting means paying heavily for housing without building an asset of their own. Time spent doing this is time that property wealth could have been compounding.
Property isn’t the only route to wealth, and home ownership isn’t right for everyone. But it remains one of the most common dividing lines between the haves and the have-nots.
Pensions
Many young people overlook the importance of their pension. Retirement feels miles away, and the pot can look unimpressive early on. The money is also deliberately difficult to access. But ask many people in their 50s and 60s what they would go back and change, and they’ll tell you they wish they had paid more into their pension pot sooner.
That’s because pensions have several things working in their favour. Employer contributions can add to what you save yourself. Tax relief on contributions is almost like having the government top up your pot. And the investments inside a pension have years, often decades, to grow.
By retirement, the gap between those who’ve had decades of pension growth and those who arrived late to the party can be enormous. Together with property, private pension wealth makes up around three quarters of total household wealth, according to ONS figures.
Investments and financial assets
Investment accounts are an interesting one. When compared to property and pensions, much fewer people hold them – apart from the wealthy. Investments are a form of flexible wealth that can help building toward longer-term goals.
The catch is that many households under pressure from the cost of living, debt or everyday bills may find it hard to save, let alone invest. For some, pension contributions or saving for a first home will quite rightly come first.
And even when the money is there, investing can feel nerve wracking. Confidence and knowledge are important to make the right decisions about what to buy, and crucially to hold onto through volatility. Property and pension wealth tends to be easier to passively hold through a storm.
We hear about the importance of investing all the time. And Charles Stanley Direct has made it possible for anyone to get started with the tools and knowledge needed.
If you’re a first-time investor, learn how to invest money wisely here: Start your investment journey | Charles Stanley
Has wealth inequality got worse?
Pictures of billionaire yachts and private jets may have you thinking wealth inequality has never been worse. But if we look at the stats, there’s actually been encouraging progress to close the gap. The Resolution Foundation has noted that UK household wealth rose from around three times national income in 1980 to around seven times national income by 2019. And today when it comes to income inequality, before taxes and benefits, the top fifth of households earn 12 times as much as the poorest; after tax and benefits, that gap shrinks to just over three times.
But given the difficulties posed by the cost of living and housing shortages, the practical gulf has arguably become harder to bridge.
So, what can you do about it?
It goes back to the old adage: you need money to make money. And economic pressures, wages, childcare costs, rent and inheritance aren’t all within anyone’s personal control. But understanding how wealth is built can still help you make the most of decisions that are yours.
The first step is to build resilience. If you have debt outside of any mortgage, especially high-interest debt, paying it down is usually the first step. After that, there are some easy wins to capture when it comes to building a pension. If your employer offers contributions, they’re part of your overall reward from work. Make sure you’re opted in to avoid missing out on their contributions. Pensions also benefit from tax relief, although the rules and allowances depend on your circumstances.
Then, for those ready to invest, diverting some leftover income to an investment portfolio to build wealth might be wise. This doesn’t require you to predict the perfect moment to enter the market. It’s about getting into the habit of putting money to work. To start doing this, Charles Stanley Direct offers an online platform, investment choices and learning resources.
Explore more here: Online Investing | Low cost trading platform | Charles Stanley
After that, it’s about having a clear realistic plan. Wealth inequality and achieving prosperity is personal. What works for some people on average might not be right for you. Whatever your starting point is, if you’d like help making a plan for your own finances, you can book a free 15-minute financial coaching session with us today.
Sources:
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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