Wealth tied up in people’s houses is no automatic ‘safety valve’ for people who have inadequate pension savings, according to new research by Royal London.
Publishing its latest policy paper on whether housing wealth can solve the UK’s pension crisis, Royal London concluded that most groups of people will not be able to live off the value of their home if they run out of money.
Using data from the Wealth and Assets Survey of around 7,000 pensioners across Britain, the paper found that those with higher pension income also tend to be those with a higher amount of wealth tied up in property. Around a third of the poorest pensioners are still renting in retirement and have no housing equity to draw on. The average amount of equity for poorer pensioners that do have property is around £150,000, compared to just over £400,000 for the richest fifth.
For those that do have housing equity, the paper points out that equity release providers will often only allow a pensioner to borrow around a third of the value of their property if they take out the policy at retirement. Most policies come with a ‘no negative equity guarantee’, and because of the impact of compound interest on equity release loans through retirement, lenders want to make sure that the borrower retains significant equity at the start of the policy.
At current annuity rates, a pot of £50,000 (a third of a £150,000 property) if used at retirement to generate a regular income could produce a weekly income of approximately £50 per week. This is a little under one-third of the rate of the new state pension which stands at £164.35 per week in 2018/19, which would be a meaningful contribution for a low-income household, but does not make up for lack of access to a decent private pension income.
However, there are exceptions to the rule, as there are lower income pensioners in London and the South East that have a significant amount of housing equity. The report noted that this is particularly the case for those who benefited from the ‘right to buy’ their council house in the 1980s and 1990s. In addition, some divorced pensioners and some widows, as well as those with inherited wealth may also have modest pensions, but meaningful amounts of housing equity.
Royal London director of policy Steve Webb said: “Official figures suggest that around 12 million people of working age are not saving enough for their retirement. It might be tempting to think that as long as such people are homeowners in retirement then they can top up meagre pensions by using the value of their home. But this research shows that even owning a home is not a ‘get out of jail free card’ for those with poor pensions.
“Many of those with low pensions also have relatively small amounts of housing equity, and lenders will often lend only a small percentage of the value of your home. Whilst using housing equity will help some groups of poorer pensioners, particularly in London and the South East, for most there is no substitute to building up a decent pension for a comfortable retirement”.
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