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Extended Financial FamiliesPublished by: Key Note Publications Ltd Published: Aug. 1, 2005 - 180 Pages Table of ContentsExecutive Summary 1. Introduction The topic Objectives Methodology Original Research Problems in the Research Process Definition 2. Strategic Overview The socio-economic structure Table 1: The UK Government's Former and Current Occupational Classifications Table 2: Socio-Economic Classification and Economic Activity of Household Reference Persons in Great Britain (000 and %), 2003 Market dynamics Market Issues Market Status Market Value Distribution Competitive structure Leading Companies Advertising Top Advertisers Consumer trends Market FORECASTS Potential and problems Scenario 1: No Tax Scenario 2: A Lot of Tax Key points 3. Patterns of Income and Wealth Democratic trap Table 3: Composition of Household Income in the UK (% of households' income in each category and £bn), 1987, 1991, 1996 and 2001-2003 Women's incomes lag Where are all the Supposed Well-Paid Jobs for Women? Table 4: Income Bands in the UK by Sex by Range of Total Income Before Tax (000 and %), 2004/2005 DISPOSABLE INCOMES RISE LESS THAN GROSS INCOMES Table 5: Household Income in the UK by Age of Household Reference Person (% and £), 2002/2003 and 2003/2004 Table 6: Sources of Household Income in the UK by Age of Household Reference Person (% of gross income), 2003/2004 Income statistics mislead Financial wealth recovers — to a point Table 7: Net Wealth of the UK Household Sector at Constant 2003 Prices (£bn), 1991, 1996 and 2001-2003 Table 8: Distribution of Marketable Wealth Within the UK's Household Sector (% owned by adults aged 18 and over and £bn), 1991, 1996 and 2000-2003 Table 9: Estimated Marketable Wealth Distribution Within the UK's Household Sector at Current Prices (% and £bn), 31st December 2004 Dearth of savings Table 10: Households in Great Britain by Amount of Savings and Total Weekly Household Income (%), 2002/2003 Key points 4. Debt: Barrier to Future Prosperity Just a few billion more What's a Few Billion Among the UK's Households? Table 11: Credit Growth in the UK (£m and index 1995=100), 1995-2005 Deficit dangers Table 12: Gross Income and Expenditure of UK Households (£), 2003/2004 Shifting the burden to the next generation Key points 5. Inheritance Tax: Barrier to the Extended Financial Family Homes worth more than the tax threshold Table 13: Payment of Inheritance Tax in the UK (£m and %), 1984/1985, 1994/1995 and 2004/2005 Tax banding proposal Exemptions favour farmers and family businesses Cutting the impact of inheritance tax in other ways Key points 6. Maximising Savings `Saving IS for the foolish' Low-Level Saving Table 14: Average Household Spending on Life Assurance, Pensions, Medical Insurance and Savings and Investments in the UK (£), 1997/1998 and 1999/2000-2003/2004 Figure 1: Average Household Spending on Life Assurance, Pensions, Medical Insurance and Savings and Investments in the UK (£), 1997/1998 and 1999/2000-2003/2004 Table 15: Households' Weekly Spending on Life Assurance, Pensions, Medical Insurance and Savings and Investments by Income Decile in the UK (£ per week), 2002/2003 and 2003/2004 Means Testing Barriers to pension saving Upside-Down Subsidies Contracting Out Not So Clever Unprotected Protection Fund Pooled savings New Stakeholder savings Depolarisation Skipton BUILDING SOCIETY: opening up debate Key points 7. A Roof for the Extended Family? Building for the LARGER family Equity release and inheritance tax Long mortgages Property in trusts and SIPPs Key points 8. Paying for Care: The Means-Test Trap Long-term care swallows capital Insurance unpopular Big rise coming in THOSE AGED OVER 85 Table 16: Forecast Rise in the Number of Persons Aged 85 and Over in the UK by Age Band (million), 2005 and 2015 Key points 9. Promotion INTRODUCTION Advertising pressure to borrow Few brands dominate advertising Limited concern with future financial prosperity Key points 10. An International Perspective Unplanned consequences Conundrum for France Pre-Industrial Legacy French System Favours Lower and Middle Earners Not Enough New Jobs Tough for Germans too Issues for Europe Governments are Overspending Table 17: Government Spending and Debt Ratios Ranked by Proportion of Debt (%), 2004 Possibility of Relocalisation Falling Populations THE US: a different path Plans to Abolish Inheritance Tax Extended Financial Families in Vancouver, Canada Key points 11. PEST Analysis Political FACTORS No Convincing Mandate Lack of Political Choice Chancellor Raising New Tax on Pension Funds Economic FACTORS The Real Costs of Growth Planning for a Post-Petroleum World Greater Economic Role for Families Social FACTORS TECHNOLOGICAL FACTORS Key points 12. Consumer Dynamics INTRODUCTION Table 18: Summary of Results (% of respondents), 2005 Means testing worries the middle aged "Means Testing Discourages People From Saving, Because Even Small Savings Bar Them From Many Benefits" "People Would Save More Money And Buy More Property If Inheritance Tax Were Abolished" Table 19: Attitudes Towards Means Testing and Inheritance Tax (% of respondents), 2005 Lack of concern for the wealth of future generations "Each Generation Should Try To Leave A Large Financial Inheritance To The Next Generation" "Once A Young Person Is 18, It Is Up To Them To Support Themselves Financially For The Rest Of Their Life" Table 20: Attitudes Towards Leaving an Inheritance, and Young Adults Should Be Financially Self-Sufficient (% of respondents), 2005 Debt goes deep "I Cannot Manage On My Present Income Without Going Into Debt" "Students Who Graduate With Large Debts Will Not Be Able To Afford To Save Enough For Their Retirement" Table 21: Attitudes Towards Present Income, and Graduates' Inability to Save for Retirement Due to Large Debts (% of respondents), 2005 Doubts about looking after PARENTS "The Younger Generation Have A Moral Responsibility To Care For Their Parents In Old Age" "It Is Sensible For People To Spend Rather Than Save, And To Rely On State Benefits When They Are Ill, Unemployed Or Retired" Table 22: Attitudes Towards Caring for Parents, and Relying on State Benefits When Ill, Unemployed or Retired (% of respondents), 2005 NON-SAVERS OUTNUMBER HIGH SAVERS "I Put Aside More Than A Quarter Of My Income Every Month For My Future Needs Such As A Pension In Retirement And Care For When I Am Very Old" "I Do Not Save Money Regularly" Table 23: Attitudes Towards Saving (% of respondents), 2005 Non-givers Outnumber The Generous "In The Past Year I Have Given A Total Of £1,000 Or More, In Cash Or Financial Guarantees, To One Or More Members Of My Family" "In The Past Year I Have Not Given Any Cash Or Financial Guarantees To Any Members Of My Family" Table 24: Giving Cash or Financial Guarantees to Family Members in the Past Year (% of respondents), 2005 Caring: a big issue "I Do Not Have A Regular Commitment To Care For Any Members Of My Family" "I Spend More Than 20 Hours A Week Caring For One Or More Members Of My Family" Table 25: Commitments to Caring for Family Members (% of respondents), 2005 Avoiding the future, again "I Would Vote For Higher Taxes To Pay For Better State Pensions" Table 26: Attitudes Towards Paying Higher Taxes for Better State Pensions (% of respondents), 2005 Key points 13. Company Profiles Introduction THE Financial sector Aviva PLC Corporate Strategy Advertising and Distribution Profitability Table 27: Financial Results for Aviva PLC (£m, £000, % and £), Years Ending 31st December 2002-2004 Future Company Developments AWD Group PLC Corporate Strategy Advertising and Distribution Profitability Table 28: Financial Results for AWD Group PLC (£000, % and £), Years Ending 30th September 2001 and 31st December 2002 and 2003 Future Company Developments HBOS PLC Corporate Strategy Advertising and Distribution Profitability Table 29: Financial Results for HBOS PLC (£m, £000, % and £), Years Ending 31st December 2002-2004 Future Company Developments Key Retirement Solutions Ltd Corporate Strategy Advertising and Distribution Profitability Table 30: Financial Results for Key Retirement Solutions Ltd (£000, % and £), Years Ending 31st December 2001-2003 Future Company Developments Legal & General Group PLC Corporate Strategy Advertising and Distribution Profitability Table 31: Financial Results for Legal & General Group PLC (£m, £000, % and £), Years Ending 31st December 2002-2004 Future Company Developments Prudential PLC Corporate Strategy Advertising and Distribution Profitability Table 32: Financial Results for Prudential PLC (£m, £000, % and £), Years Ending 31st December 2002-2004 Future Company Developments The Royal Bank of Scotland Group PLC Corporate Strategy Advertising and Distribution Profitability Table 33: Financial Results for The Royal Bank of Scotland Group PLC (£m, £000, % and £), Years Ending 31st December 2002-2004 Future Company Developments Skipton Group Holdings Ltd Corporate Strategy Advertising and Distribution Profitability Future Company Developments Standard Life Bank Ltd Corporate Strategy Advertising and Distribution Profitability Table 34: Financial Results for Standard Life Bank Ltd (£000, % and £), Years Ending 15th November 2002 and 2003 and 31st December 2004 Future Company Developments THE Home-building sector Barratt Developments PLC Corporate Strategy Advertising and Distribution Profitability Table 35: Financial Results for Barratt Developments PLC (£m, £000, % and £), Years Ending 30th June 2002-2004 Future Company Developments Countryside Properties PLC Corporate Strategy Advertising and Distribution Profitability Table 36: Financial Results for Countryside Properties PLC (£000, % and £), Years Ending 30th September 2002-2004 Future Company Developments Crest Nicholson PLC Corporate Strategy Advertising and Distribution Profitability Table 37: Financial Results for Crest Nicholson PLC (£000, % and £), Years Ending 31st October 2002-2004 Future Company Developments Redrow PLC Corporate Strategy Advertising and Distribution Profitability Table 38: Financial Results for Redrow PLC (£000, % and £), Years Ending 30th June 2002-2004 Future Company Developments Key points 14. The Future No one to pay for the old The outlook for property Negative Positive Table 39: Intended Methods of Repaying Interest-Only Mortgages in England (% and 000), 2003 Downshifting Who wants to be an entrepreneur? Changing profiles More debt, less inheritance Key points 16. Consumer Confidence METHODOLOGY THE WILLINGNESS TO BORROW Table A: The Average Amount Consumers Are Willing to Borrow in Order to Purchase Expensive Items at Current and Constant May 2003 Prices (£ and £bn), May 2003, November 2004, February 2005 and May 2005 Consumers Willing to Borrow Table B: The Number of Adults Willing to Borrow in Order to Purchase Expensive Items (000 and %), May 2003, November 2004, February 2005 and May 2005 THE WILLINGNESS TO SPEND FROM SAVINGS Table C: The Average Amount Consumers Are Willing to Spend from Savings in Order to Purchase Expensive Items at Current and Constant May 2003 Prices (£ and £bn), May 2003, November 2004, February 2005 and May 2005 Table D: The Average Amounts Adults Are Confident Spending To Purchase Expensive Items (£ and %), May 2003, November 2004, February 2005 and May 2005 17. Further Sources Associations Publications General Sources Government Sources Other Sources Bonnier Information Sources AbstractThe 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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