A third of gen Z - people born in or later than 1996 - believe property will be their main source of wealth in retirement, according to research from Standard Life’s Retirement Voice report.
The research, which reveals different attitudes between generations when it comes to funding life after work, found that this was in contrast to older generations.
According to the research, baby boomers (people born between 1946 and 1964) favoured pensions (42 per cent) rather than property (18 per cent).
Only 30 per cent of gen Z said they intended to use pensions to fund their retirement.
Meanwhile more millennials (those born between 1981 and 1996) also saw their pensions as their main asset in retirement (36 per cent) rather than property (22 per cent).
Percentage favouring property or pension to fund retirement
| Property | Pension |
Gen Z | 33% | 30% |
Millennial | 22% | 36% |
Baby Boomers | 18% | 42% |
Furthermore, when it comes to how different generations view their home in financial terms, 35 per cent of gen Z saw it as a source of wealth they can draw on if needed, particularly during retirement, compared to only 24 per cent of millennials and gen X, and 20 per cent of baby boomers.
Gail Izat, managing director for workplace at Standard Life, part of Phoenix Group said: “It’s understandable that younger people expect property rather than pensions to fund their retirement as buying property is likely to be their biggest current financial goal, and pensions less of a priority.
“However, in many ways it’s far harder for Ggen Z to rely on property alone than previous generations – they’re facing higher house prices compared to their salaries, higher mortgage costs as well rising rental costs preventing many of them from saving enough to buy.”
Izat said this underlined the importance of employers and providers engaging with people of all generations, and making sure products, services and communications are relevant to each audience.
“Open finance tools can help people view their finances in the round – and could show how owning property and saving into a pension aren’t mutually exclusive, and can instead sit together as part of a diverse portfolio,” he said.
Realistic expectations
While many young adults intend to use their property as their main source of retirement income, Standard Life’s research, conducted among more than 6,000 people, highlighted that this may not be a realistic expectation, especially given the nature of the housing and mortgage market today.
Just one in 10 (10 per cent) of gen Z currently have a mortgage that they could have started paying off, while 20 per cent were worried about the prospect of having to pay off a mortgage in retirement.
Longer lives think-tank Phoenix Insights estimated that, based on current expectations, over 13mn people are likely to face ongoing rental or mortgage costs in retirement.
Izat said: “Pensions have a number of advantages such as tax relief on contributions, employer contributions and the potential to benefit from investment growth.”
“On the downside, pension savings can’t be accessed until the minimum pension age, and people with a defined contribution pension will need to assess how long it needs to last when considering how much to save and how much to take each month in retirement, unless they take an annuity.”
He explained that with property, there’s the option to sell before the minimum pension age but for most people, their property will be their home – so to access any money they’ll have to downsize, move to a cheaper area or consider equity release.
“Equity release can be valuable for people without any other assets but its important anyone considering this takes advice to make sure it’s right for them,” he added.
Adviser view
Speaking to FT Adviser, Tom Kean, director at Thameside Financial Planning, said the world was very different now compared to a generation or two ago.
“That said, when I moved into my first home - a rather dull flat in sunny High Wycombe - my overarching feeling was that if I didn’t do it then, I would be a renter for the rest of my life and I would never own my own home,” he said.
“At the time (the late 80s) that was a fate worse than death. I had to beg borrow and steal to furnish this empty space; but it was strangely fun at the time. Then property prices crashed and interest rates went up to 15 per cent, so it seemed pretty hairy back then too.”
Kean said the survey accurately reflected the fact that final salary schemes were more common back then and that property is still a popular asset class.
“Of course, pensions have had such a long run of bad press that it is no surprise people think they’d be better off doing something else, regardless of the fact that pensions are still top dog to anyone who works out the maths, including the maths on death, which is never a nice thing to do,” he said.
Meanwhile, Lisa Meller, IFA at Personal Finance Movement, said it was interesting to see that over the generations the potential reliance on property rather than a traditional pension appears to be increasing.
“As is well known a lot of baby boomers sit on property wealth as a result of the house price increases over their lifetimes which will be passed down the generations,” she said.
“So there is an air of opportunity around property in the younger generations having seen the house price increases for their parents and grandparents despite the barriers younger generations now face when entering the property market.”
Nevertheless, Meller argued that it was important to “err on the side of caution” when viewing your home as your retirement as that often, though not always, requires downsizing.
“A lot more people now travel in retirement and this opens up an opportunity to potentially rent out their home and draw an income from it in retirement without having to sell the property and can therefore be a great option in the right circumstances,” she said.
“Pensions present an opportunity for long term investing in the stock market in a tax efficient manner and should not be disregarded.
“They are also often an important element of tax planning especially for higher earners.”
She argued that for retirement - as for any long term investment - it was important to diversify, and she hoped to see employers encourage young people not to opt out of pension schemes and to regularly contribute to them, especially in the early years of their career.
sonia.rach@ft.com
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