Housing is often overlooked when people consider their financial options in retirement, which is strange when many put off contributing to a pension because ‘my house is my pension’. However the reality is that drawing down equity from a house in retirement is often taken as the last available option.
This is because housing is a very emotive topic. Owning a property is no longer just about having somewhere to live. It is now viewed as an investment opportunity, an inheritance for children or grandchildren, a pension, a means to meet the cost of long-term care, or a combination of all of these.
That is assuming that you can get on the property ladder in the first place. Young people are struggling to save towards a deposit – while contributing towards a pension plan is often a secondary option.
Britons’ love affair with housing is well-documented, and saving for a house deposit is a powerful motivation to save. But house price inflation is making it harder for people – even those on average incomes – to afford their first home.
Conversely, for those at or approaching retirement, house price inflation is creating a huge amount of personal wealth tied up in retail housing, with some studies estimating this to be higher than that invested in the stock market. However, significant barriers are preventing this housing wealth from being drawn into mainstream retirement planning.
Partly this is due to the feeling that many families have about passing their property on to the next generation as a legacy. The family home is an illiquid asset, often only sold on the death of both members of a co-owning couple.
But we need to recognise that taking the first step on the housing ladder is getting harder by the day. The Social Innovation Partnership’s original research pointed to a population that is increasingly having to rent, while an estimated 3m 20 to 34-year-olds are living with their parents.
It should, therefore, not come as a surprise that the average age of the first-time buyer has increased from 24 in 1970, to 28 in 2000, and 37 in 2013.
The result is a double whammy of the burden of paying rent plus saving for a large house deposit impacting on a household’s ability to save for other events, including retirement. Meanwhile the declining levels of home ownership with each generation mean the ability to make a home an income in retirement is diminishing.
Set against this, it has been estimated that the average pension pot size in the UK is £28,000, approximately £202,000 below what would be needed to retire on two-thirds average pre-retirement income. We predict that unless retirement income provision improves we will reach a tipping point in 2035 when a generation retires less well off than the previous one – a situation not seen since the establishment of the welfare state almost 100 years ago.
Even those who own their own homes face a dilemma if they want to release equity to create an income in retirement.
The alternative is to downsize, and our findings indicate that 16 per cent of people would choose this as a way of providing an additional income in retirement. But this is not always as straightforward as it seems. First, people have to find a less expensive area to move to. Also, will the move actually generate a large enough sum of money to really make a difference to their retirement income?
