Pensions are largest components of household wealth

What does this chart show?
That property wealth has been overtaken by the amount of wealth held in pensions in the past decade, according to analysis by the Resolution Foundation, a think-tank, using data produced by the Office for National Statistics.

Forty-two per cent of household wealth was held in private pensions between 2016 and 2018, whereas 35 per cent of household wealth was held in property across the same period.

This is a reversal of figures from 2006-8, when property accounted for 42 per cent and pensions accounted for 34 per cent of household wealth.

The Resolution Foundation looked at the components of wealth in six two-year periods from 2006-8 to 2016-18 in Great Britain. Its data on pension wealth did not include state pension entitlements, but does incorporate defined benefit schemes, defined contribution schemes and private pensions.

What is behind the increase in pension wealth?
According to the think-tank, falling interest rates and rising longevity led to an increase in the real value of pensions, from £3.6tn in 2008 to £6.1tn in 2018. This is largely due to a rise in life expectancy, which increases the amount of wealth accrued via pension plans.

George Bangham, policy analyst at the Resolution Foundation, said: “Pension pots have increased in value by 70 per cent over the past decade. This has been driven more by lower interest rates and rising longevity than by higher pension enrolment, though the latter will have more of an impact over time.”

The rise in pension wealth can largely be attributed to defined benefit pension plans, which account for 80 per cent of pension schemes.

A Resolution Foundation report published in June found that auto-enrolment of workers into workplace pensions had a small, but significant, effect on the rise in pension wealth.

“Those born in the late 1970s and 1980s are 50 per cent more likely to be contributing to a pension in their thirties than their predecessors were 10 years before them at the same age,” it said.

“Auto-enrolment has boosted pension wealth for younger cohorts . . . but defined benefit pensions continue to dominate in volume of wealth terms.”

The ONS has also pointed to the fact that there are now many more people paying into private pension schemes to explain the increase in total private pension wealth. In addition, there has been a rise in the number of preserved pensions — those that are no longer being contributed to, but are not yet in payment.

What else does this tell us about household wealth?
Mr Bangham says three-quarters of the growth in pension wealth in the six years to 2012-14 was down to valuation changes in defined benefit plans.

The concurrent reduction in household wealth held in property can be explained by a slight cooling in the property market.

The rise in the financial category, which includes investments and funds, is largely accounted for by increases in the total wealth held by the highest income group. Financial wealth owned by the richest 10 per cent increased in value by 15 per cent between 2014-16 and 2016-18, in real terms.

According to the Resolution Foundation, total household wealth is now seven times GDP, the highest multiple in more than 100 years. In the 1970s, the total amount of wealth held by households was closer to three times GDP.

However, it added that this wealth is not equally distributed. The richest 10 per cent of households are the beneficiaries of the recent wealth boom, as they own almost half of the nation’s wealth.

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