PensionReforms summary and comments
One of the main objectives of any planning for retirement provision for those who have choices must be to have a debt-free home by the time earnings from work come to an end.  For that reason, in most developed countries, housing wealth tends to be the largest single component of households' financial resources.

This is the second report in a series from the UK's Pensions Policy Institute "...looking at the evolution of financial needs during the course of retirement and the roles of different sources of income in meeting those needs."

The report notes that of the total net wealth of UK households (of all ages) of £6,875bn, 40% is housing wealth, 30% is pensions wealth and the rest is mostly (18%) in other financial assets with 12% in non-financial wealth.  Interestingly though, the most popularly perceived form of retirement saving (64%) is private pensions.  PensionReforms notes that, interestingly, "pensions wealth" exclude public pension wealth.  Including that might give a fuller picture of retirees' overall position.

As might be expected, the distribution of housing wealth is unequal:
"...the top 10% of homeowners aged over 50 with the most housing wealth, own around 30% of UK housing wealth held by people over 50, and the top 20% own nearly a half. More than 20% of individuals aged 50 or older in England have no housing wealth at all, so cannot rely on any housing to support them in retirement."

For most, housing wealth "..is likely to be a complement to, rather than a substitute for other forms of retirement saving."

Owning a home in retirement has a direct impact on living costs:
"Owning your own home in retirement can reduce living costs relative to paying rent (not having any housing wealth) by around 30% for a single person and by around 40% for a married couple."

A home that is owned may also increase financial options in retirement - downsizing can release cash  ("Of people who do own their home, 29% plan to downsize their property in order to provide retirement income.")  They can also be used as security for an 'equity release' product.  These are relatively uncommon in the UK:
"At the end of 2005 there were 100,000 lifetime mortgages outstanding, worth around £5bn. This is around 1% of the net housing wealth held by UK pensioner households."

That financial support might be needed to help with the costs of ill-health:
"Of those who own their own home, 5% intend to use equity release to fund any care they require as they get older."

PensionReforms notes that the UK government may make that a requirement - see here.

Another possible use of housing wealth in retirement is to take in boarders or buy a rental property:
"In 2006, there were around 16,000 boarders and lodgers living in pensioner households, and around 2% or 200,000 retired adults reported receiving rental income from a second property. Although the number of pensioners with more than one property is small, recent trends suggest this may increase in the future."

The report then looked at what might happen in the future with respect to this important section of households' wealth.  It also models some typical situations.  Among the suggestions were a possible increase in the proportion of retirees owning their own home (possibly to as many as 80%) and a real increase in housing wealth, including the proportion that could be available for equity release.

"However, there are a number of barriers to the growth in the use of housing assets to support retirement:
·   Emotional issues can dissuade people from downsizing their house. People have ties to both their home and their area and may be reluctant to move if it means moving away from friends, families and their local amenities.

·   People may wish to pass on their house as a bequest, they may be reluctant to spend what they see as their children's inheritance.

·   Releasing equity can in some cases reduce entitlement to means tested benefits. Wealth that is held within property does not affect Pension Credit or Council Tax Benefit, however releasing income from housing wealth can reduce entitlement to those benefits.

·   Equity release products still have an image problem after mis-selling and bad product design in the late 1980s that left pensioners in debt although this may be helped by FSA regulation and the no negative equity guarantee in SHIP compliant products.

·   The interest rates charged by equity release providers often appear high, relative to other mortgage products, although this may be due to the different risks faced by the providers of equity release products.

·   There are currently no major banks offering equity release products. This may reduce the awareness and attractiveness of the product. However there are large insurance companies in the market such as Prudential and Aviva."

PensionReforms suspects that more, better regulation is unlikely to help meaningfully to develop the equity release markets and that the government itself will probably need to get directly involved on some basis as it has a public policy stake in so doing.  There will be some clear cases where equity release is appropriate - insufficient income/debt-free home and particularly where there is no bequest motive.  The private market for equity release is likely to be limited to 'do-it-yourself' options such as downsizing, subdivision of land, taking in a boarder or separating part of the home as an independent sub-let.

Regardless, PensionReforms suggests there is no doubt that the first retirement saving objective for those who are able should be a debt-free home.  Not only does it reduce retirement living expenses as the report notes but it also reduces risk and increases late-life options. (File size 474 KB; 57 pp) 339