Property as a pension is generally considered a reliable option when thinking about retirement savings. Consequently “my property is my pension” is something we financial planners often hear. However, as I often say, “You can’t take a brick to to the supermarket” and unfortunately relying on property wealth in lieu of a decent pension pot is just not the best option for most people.
Options for retirement savings
While low pension savings levels can be justified in some cases, for most people there is a big gap between what they believe their property can provide in later life and the reality of its true value in their retirement.
Clearly property is an important consideration in retirement, not least because more than three-quarters of pensioners own their own home. As a result of this, combined with a pension shortfall, equity release is becoming a popular choice for a growing number of retirees.
Look at all the options
However, new research from insurer Royal London suggests that, for most retirees, it is essential to look at at all the options for retirement savings as housing wealth is unlikely to be enough to overcome the issue of inadequate pension savings. This is especially important if you are self employed or a small business owner, or a divorced woman.
The research – ‘Will Housing Wealth Solve the Pensions Crisis?’ – concludes that the challenge of 12 million people not saving enough for their retirement cannot be solved by assuming the shortfall will be met with property wealth.
Using data from the ONS Wealth and Assets Survey, Royal London looked at the pension income and housing wealth of nearly 7,000 pensioners across the country. In particular, they examined how far those with poor pensions are sitting on significant amounts of housing equity.
Within the report, one key finding was that while those with the highest pensions are almost all homeowners, around a third of the poorest pensioners are still renting in retirement and have no housing equity to draw on.
This finding is important because it suggests a correlation between those who could benefit most in retirement from tapping into those housing wealth and those who don’t own property from which to release equity.
The research also found that the people with the most housing equity tend to be the same people who have the highest pensions. Amongst the poorest fifth of pensioners, the average housing equity is only around £150,000, compared with just over £400,000 for the richest fifth.
An exception to the rule
There is a significant exception to this rule. Lower income pensioners who may have a worthwhile amount of housing equity were found in London and the South East, particularly those who benefited from the ‘right to buy’ their council house back in the 1980s and 1990s
Some divorced pensioners and some widows as well as those with inherited wealth may also be exceptional in combining modest pensions with meaningful amounts of housing equity.
However, as we might expect, average housing equity levels amongst retired pensioners vary greatly depending on geographical location. In the North East of England, the average housing wealth was £136,000. This rises to an average of £399,000 in London.
Despite pensioners holding significant levels of housing wealth in some cases, it’s important to keep in mind that equity release providers often limit what they are prepared to lend to around a third of the value of the property. This is because equity release policies come with a ‘no negative equity guarantee’, which means equity release providers want to make sure the borrower retains a sizeable amount of equity at the start of the policy, to allow for compounding interest charges and longer life expectancy in retirement.
An alternative option
An alternative way to access housing wealth in retirement is to downsize to a smaller and cheaper property. However, Royal London concluded this option is unlikely to be attractive for most retirees. This is because the supply of ‘step down’ retirement accommodation is limited and often expensive. This reduces the amount that can be freed up by downsizers.
In addition, newly-retired families are often reluctant to sell up and move away from networks of families and friends. They also may not want to eat into housing equity that they plan to pass on to their children.
Commenting on the findings, Steve Webb, Director of Policy at Royal London said:
“Official figures suggest that around 12 million people of working age are not saving enough for their retirement. It might be tempting to think that as long as such people are homeowners in retirement then they can top up meagre pensions by using the value of their home. But this research shows that even owning a home is not a ‘get out of jail free card’ for those with poor pensions.
“Many of those with low pensions also have relatively small amounts of housing equity, and lenders will often lend only a small percentage of the value of your home.
“Whilst using housing equity will help some groups of poorer pensioners, particularly in London and the South East, for most there is no substitute to building up a decent pension for a comfortable retirement”.
It’s never too late to start saving for a meaningful retirement fund. Do get in touch if you would like to discuss your retirement planning and how your property wealth could factor into this planning.
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