Britain's divided decade

the rich are 64% richer than before the recession, while the poor are 57% poorer

The gap between richest and poorest has dramatically widened in the past decade as wealthy households paid off their debts and piled up savings following the financial crisis, a report warns today.

By contrast, the worst-off families are far less financially secure than before the recession triggered by the near- collapse of several major banks. They have an average of less than a week’s pay set aside and are more often in the red.

Younger workers have fallen behind older people while homeowners – particularly those who have paid off their mortgages – have become increasingly affluent compared with their neighbours who are paying rent.

There are currently 18 million people who cannot afford adequate housing (Getty)

Evidence of Britain’s rapidly growing wealth gap was revealed by the Social Market Foundation (SMF), which analysed the changing incomes and savings of thousands of people. Its findings will be seized on by Labour as evidence that any recovery from the downturn is uneven and not shared across all income groups. However, the trends uncovered by the SMF began before the Coalition came to power, underlining the huge impact of the credit crunch on levels of affluence.

It found that the average wealth of the best-off one-fifth of families rose by 64 per cent between 2005 and 2012-13 as they put more money aside as a buffer against future shocks. They have average savings and investments of around £10,000 compared with £6,000 seven years earlier.

The proportion of people in this group with debts (apart from mortgages) dropped from 43 per cent to less than one-third. However, the SMF found the poorest 20 per cent are less financially secure than they were in 2005, with their net wealth falling by 57 per cent and levels of debt and use of overdrafts increasing.

Homeowners have raced ahead of people in rented accommodation, largely due to low-interest mortgage rates compared to higher renting costs. Homeowners who paid off their mortgages between 2005 and 2012 find themselves £2,500 better off. These gains are above and beyond the rise in property values over the period, the SMF said.

Meanwhile, the inter-generational gap in incomes and wealth has widened significantly. The wages of those aged 26 to 35 fell steeply and they are far less likely to be property owners, with the proportion in this age bracket who are buying a home falling from nearly three-quarters in 2005 to just over half in 2012-13.

On average, they have less than a week’s income in savings, owe 45 per cent more money than they did in 2005 and are increasingly running up overdrafts to pay their bills.

“There is a need to support those on the lower incomes and younger age groups to save more. But this will be challenging, especially for those with little income to spare once necessities have been paid for,” said the SMF report Wealth in the Downturn: Winners and Losers. “The process of repairing personal finances will most likely only begin once the expected growth in wages materialises.”

The number of children in relative income poverty is currently 2.3 million in the UK (Getty)

It said the declining financial health of younger workers and people on low incomes limited the economy’s ability to rely for growth on consumer spending among all income levels. And it warned that these groups are ill-prepared for future financial shocks or rises in interest rates.

Nida Broughton, the SMF’s chief economist and the report’s co-author, said: “Our findings show the wealth gap between rich and poor and young and old increased during the downturn. The economic uncertainty... prompted many to pay their debts and build up their savings. But the young and those on low incomes missed out.”