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Viewing report
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Extended Financial Families Market Assessment 2005
Key Note Publications Ltd, Aug 2005
The concept of the `extended financial family' has been developed by Skipton Building Society. The extended financial family has the potential to provide social welfare and to save the Government money in the process. Middle-income groups — junior managers and professionals, small employers, the self-employed and skilled workers — are the most likely to need to pool resources to care for dependants and protect assets for the future. The problems include fragmented families that do not wish to co-operate, the inheritance taxation regime that penalises inter-generation transfers, a shortage of suitable housing with annexes and the lack of value that the Government — and society — places on unpaid work such as caring for dependants.
The Government faces a democratic trap. The elderly, who are rising in number, are far more likely to vote than the young, and the elderly want higher basic pensions. Yet no government can afford a significant rise in the basic pension without a painful rise in taxation, or unless it forces all those in their 60s to stay in work. The latter scenario depends on there being enough jobs available and on elderly workers being fit and having no caring responsibilities.
From age 50, income from wages and salaries falls off rapidly. From age 75, more than half of households' income is from social security benefits. If more households are to be financially viable in the future, a higher proportion of income will have to come from employment and self-employment after the age of 50.
The most affluent 1% of adults own almost a quarter of all marketable assets, but the polarisation is even more striking when dwellings are excluded: there is almost nothing left for the least affluent half of the population.
UK households are spending vastly more than their income. The average gap in 2003/2004 was almost £22 a week. The situation was far worse for four in every five households. The overall average was improved by the large surpluses of the 10% of households with the highest earnings. The annual deficit was highest among the poorest 10% of households, but the annual deficit exceeded £2,500 between the fourth and the seventh deciles and was more than £2,000 in the eighth decile. The figures highlight the phenomenon of middle-income households who are being kept afloat financially by the value of the equity in their homes, and who are thus vulnerable to any downturn in the property market.
Inheritance tax is not as significant in total national taxation revenues as it is often feared to be, but accounts for a rising proportion of taxation receipts. The threshold increases announced in the 2005 Budget still mean that, from 2008, 40% tax will be payable on assets valued at more than £300,000. While the wealthiest can afford expert advice to minimise inheritance-tax liabilities, many of those whose principal asset is a house cannot afford advice and will pay proportionally more tax than their much wealthier neighbours. In the future, many extended financial families may run businesses, to benefit from inheritance-tax exemptions, although governments will need every penny they can raise in taxation.
Planning regulations restrict builders' capacity to provide homes ideally suited for extended families, because new homes must fit onto plots at a density of at least 12 per acre. The density rule forces builders to go upwards rather than outwards, creating properties that may not be suitable for the elderly unless lifts are fitted.
Equity-release schemes offer the over-70s a trade-off from housing equity to cash. The drawback is that the costs of such schemes swallow assets that could otherwise be bequeathed to beneficiaries.
Insurance against the costs of long-term care is unpopular. People try to avoid thinking about how they would pay for future care. The over-85s are the prime customers for care in nursing homes. The number of people aged 85 or more in the UK is expected to rise dramatically in the next decade. In many cases, their families will be called upon to provide care.
A rise in the number of extended financial families would have implications for social welfare payments. Research in South Africa has found that pension payments might not benefit the intended recipients if they live in extended family households.
The extent of wealth redistribution in France has limited the pressures for extended financial families to form, but high unemployment among the under-30s is forcing more young people to remain living with their parents. Severe constraints on incomes might herald a revival of extended financial families in Germany.
The US continues on a policy path leading to widening disparities of income and wealth. Extended financial families are a likely way for those in the middle to pool their resources.
In 2005, the UK dependency ratio — the proportion of pensioners to those of working age between 20 and 64 — is 27%. By 2020, the ratio is likely to rise to 33% and in 2050 it could be 47%. Demographic pressures alone will force many middle-aged offspring either to look after their parents or to see them live in poverty. One possible outcome is a rise in neglect of the elderly.
Interest-only mortgages pose a problem for future years. More than one mortgage-paying household in every 35 has an interest-only mortgage without any definite capital to pay off the loan when it matures. Shortfalls in endowment policies mean that there are questions hanging over the repayment of up to 35% of mortgage balances.
The indebtedness of so many households means that it will be hard for them to amass enough savings to repay their mortgages and build up their pension funds. Multi-generation households, sharing expenditure, should develop quickly in the hard-pressed middle echelons of UK society, as they face debt, the costs of education, housing and retirement, and reduced inheritance expectations as the elderly use their capital to support themselves. Looking beyond 2025, financial families extended from necessity could exceed one household in every 100. If households' finances worsen considerably, this scenario could be a reality in 2015 or sooner.
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