UK household portfolios

Abstract

This paper presents a detailed analysis of the composition of household portfolios, usingboth aggregate and micro-data. Among the key findings are that:• Most household wealth is held in the form of housing and pensions. Over time, there hasbeen a shift away from housing towards financial assets, driven largely by the growth inlife and pension funds.• Liquid financial wealth (excluding life and pension funds) is not predominantly held inrisky form. By far the most commonly held asset is an interest-bearing account at a bankor building society account. Of people with positive (liquid) financial wealth, more thanhalf is held in savings accounts.• The importance of risky assets in an individual’s portfolio varies according to theircharacteristics. The unconditional portfolio share held in risky assets (i.e. averagedacross those with and without any risky assets) rises with both age and total financialwealth. However, most of the variation in unconditional portfolio shares is due todifferences in ownership rates as opposed to the proportion of the portfolio held in riskyassets. Looking only at the people within each wealth decile who have risky assets, theconditional portfolio share is relatively constant across wealth, suggesting a possible rolefor entry costs or other fixed costs in explaining portfolio holdings. Multivariate analysisshows that the conditional portfolio share in risky assets actually falls with age asclassical portfolio theory would predict.• Finally, the tax treatment of savings products has an effect on portfolio choice. Separateprobit regressions for the ownership of tax-favoured assets and similar assets without thetax exemption, show that, controlling for other factors, marginal tax rates are important in determining asset ownership. These results are in accordance with those found by Poterba in the US