The role of housing as an asset in retirement

Charles McCready, director at TISA, says people must be taught how to save effectively for their old age.

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Research by TISA shows that over the next 15 years over 10m people in the UK will enter retirement, typically relying upon the two biggest assets available to them – their pension and home. However, big pension changes and the benefits they offer plus property value increases have resulted in shifts to attitudes and expectations regarding how retirement will be funded in the future. TISA has therefore undertaken a review of the role of the home, seeking to address this new dynamic and help people to understand what they can realistically expect from the financial resources available to them.

Pensions have undergone a quantum shift from generous employer schemes with high levels of employee take-up and known retirement outcomes to a lack of engagement and uncertainty about how much people will get when they retire. Defined benefit (DB) schemes are rapidly becoming the preserve of the public sector, where they are available to over 95 per cent of employees. In the private sector, such schemes are only available to five per cent of the workforce, with the rest offered defined contribution (DC) pensions.

Prior to 2012, only 37 per cent of women and 40 per cent of men were saving for a non-state pension and a further 33 per cent had entitlement to pensions they were no longer contributing to. The next 15 years marks a period where many of the people retiring will still benefit from having been part of a DB pension scheme at some point during their career. But this diminishes as people retire on much smaller pensions than their predecessors.

This heralds the beginning of a generation of retirees who either saw a low take-up of occupational DC pensions or were enrolled into schemes with very low contributions.

Our research looked at 1,000 people aged 50 and over to understand how they expected to fund retirement. The anticipated average household income was £29,000 per annum, a drop of 35 per cent from their working life incomes. Only half were confident that they had saved enough to provide sufficient income in retirement, with the average income shortfall being £11,400 per annum, taking into account a full state pension of £8,000 per year.

To cover this gap, almost half the group would consider downsizing to release equity in their home to boost retirement income. Only seven per cent would use equity release. The average amount expected to be released was just over £100,000, with the expectation that this would provide between £4,500 and £6,600 of annual income. With annuity rates being close to 4 per cent, this over-estimated the expected income by between 12 and 65 per cent. Importantly, this is considerably less than the average £11,400 predicted shortfall. This points markedly to the danger of people relying upon their home to fund their life during retirement without having benchmarks to validate their assumptions.

We also identified a lack understanding of the impacts of downsizing and in particular how equity release works. While two-thirds professed to know what equity release was, further investigation showed that overall the group were only able to correctly answer three out of 13 basic questions on the matter. Our findings clearly point to the need for greater financial planning across all forms of retirement savings, including the home. 70 per cent of the research group want the home to be included in financial guidance and advice. Today neither guidance services nor advice consider using the home as an asset in retirement.

This needs to be addressed by government and the FCA to provide time for the rapidly growing number of people relying upon their home alongside other savings to ensure that they can enjoy financial wellbeing in retirement. Proposed actions include building a governmentsponsored campaign to raise awareness of the importance of housing wealth; including its consideration in retirement and creating a regulatory environment that encourages holistic financial advice.

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