Homeownership for the generation of people aged 50 and over has boomed, but pension saving has been in decline. Millions of Britons are therefore going to be reliant on equity in their property to top-up state and any private pension to provide an income in retirement.
But is this realistic? Recent research from Tisa and Old Mutual Wealth set out to identify the scale of under-saving for retirement, the role housing might play in boosting retirement incomes, and whether people really understood how it might work in practice.
There are almost 11m people in the UK aged between 50 and the state pension age who will most likely be entering retirement between now and 2030. We found that two thirds of them are facing different degrees of retirement under-saving and more than half are relying on chance rather than a financial plan. The self-employed are at particular risk.
However, 8.9m people from this cohort have equity wealth within their home. For 2.5m of this group, that equity is worth between £1,000 and £125,000, while a further 4.7m have between £125,000 and £375,000.
But while this sounds reassuring, the reality is that even if it were possible to release £150,000 in equity, it would only provide an income of between £4,500 and £7,5000 per annum depending on the annuity or drawdown option selected.
We asked The Wisdom Council – an independent financial research company – to survey more than 1,000 people aged 50 or over to understand their goals for their lives post-retirement, and how they might use the equity in their home to help finance this.
Encouragingly, the expectation of the level of retirement income required to meet their aspirations - typically two-thirds of salary – set a realistic target. However, three quarters had either not done any planning for retirement or had not revised their plans for many years. Despite this, 50 per cent were confident that they would have sufficient income in retirement.
Furthermore, 70 per cent were expecting their non-pension savings to provide at least a fifth of their retirement income, even though our other research indicates that most of them have nest eggs that will provide much less than this.
Downsizing is unlikely to generate sufficient sums to make up any income shortfall, and it was interesting to note a negativity towards equity release. Only 14 people out of the 1,000 surveyed were actively planning to use equity release, while for those who subsequently realised they might have an income shortfall to address, only 6 per cent said they would consider it. This is partly due to a lack of education as while two-thirds claimed to have good knowledge, but when tested with a series of questions it revealed a serious lack of understanding.
Given that so many people are planning to use their home equity, or will do so out of necessity, we believe it is critical that financial guidance and advice considers home equity alongside other savings. This would help people to take a holistic view of how they will fund retirement, ideally without needing to use their home. It is crucial that those banking on the home for an income in retirement get a good understanding of how much this will actually provide.
It is also important to make access to wealth in the home mainstream, as the need to do so is almost certainly going to grow significantly in the next few years. Consumers will therefore need greater access to products that let them boost their retirement income as an alternative to downsizing.
The message is clear: more needs to be done to make consumers aware of the likelihood of a retirement income shortfall. We need equity in the home to be part of financial planning, and as the need to access this wealth becomes more pressing, we need to provide the support and solutions today that will help make retirement more comfortable.
David Dalton-Brown is director general of Tisa
