New conversations are needed about freeing up accumulated housing equity. It’s usually one of the best investments most people will ever make and, has the potential to deliver an important, tangible difference for UK retirees.
The retirement income gap
The gap between people’s desired and actual retirement experience has been prevalent for a while now, and it is set to continue for the foreseeable future. Some of the key underlying reasons for this gap include:
1. The stable outlook for longevity – meaning that full retirement income needs to be funded for twenty years or more. A male reaching age 65 can expect to live until 85, a female to 87 years of age1.
2. The more recent strains on finances created by rising inflation, higher interest rates and the consequent cost of living crisis, which will, likely, be felt throughout 20232.
So, the reality of retirement finances for many people is somewhat stark. For many, pension savings will continue to fall well short of what will be required to sustain a secure retirement.
Estimates from the Pension and Lifetime Savings Association (PLSA) state that, for a couple, a moderate retirement would cost £34,000 a year, rising to around £54,500 a year for a comfortable retirement3.
Ongoing economic uncertainty, inflation, turbulent markets, and the spiralling cost of living has only increased what will need to be saved for retirement and, for those already in retirement, additional strain is likely to be felt on household finances.
But - the most significant investment most people will ever make over their lifetime – the family home - remains largely untouched as part of retirement finances.
Closing the gap – with an asset that is waiting to be used.
For some people in their sixties and seventies, mortgage-free accumulated housing equity could assist with bridging retirement funding gap. With the right advice, historic gains in house prices could be put to more active use and provide greater financial certainty as a basis for a more comfortable and fulfilling retirement.
Along with accrued pension savings, the home is often the biggest source of capital but, for the vast majority of older people, does not form part of a holistic retirement plan. Figures from the Equity Release Council show total market lending in 2022 reached £6.2bn, whilst Savills estimated there to be nearly £2.0tn of homes in England in Wales owned by those over the age of 65 in early 20224.
Although property wealth is considered as part of the financial planning process, it is often not considered an ‘active’ ingredient of an overall plan, unless it forms part of, for example, a buy to let portfolio or legacy inheritance planning.
Most often, the family home is seen as a ‘break glass in an emergency’ solution, a last resort. However, if housing equity growth could be framed in a similar way to other investments, as useful resources to be drawn upon in times of need, then improved consideration for accessing it may follow. After all, investing in bricks and mortar is widely seen as prudent and sensible, so it’s a challenge for the market to address the suspicion that surrounds drawing on the benefit of housing equity gains in retirement. It should always be remembered that most people want to stay in the family home rather than move out of the area or into a smaller house. So, the logic of down-sizing to release equity, all too often, does not work out.
Prudently combining pension wealth with property wealth may lead to very different outcomes when it comes to producing a sustainable retirement income and any final legacy for the family.
Of course, considered professional advice is critical in assessing the suitability of any such approach - releasing equity will not be suitable for everyone. It’s important to consider the full range of alternative options available to generate income and / or capital to meet your customer needs and take into account their personal views on inheritance.
Just how well has housing equity performed?
The average UK house price stood at £25,589 at the end of Q1 1984 and, by the end of Q3 2022, this would have risen to £294,2745.
According to the ONS, median equity in property was around £240,000 for those age 66+ in the period April 2016 to March 20186. The family home is clearly primarily a place to live, to make memories and to be comfortable. It’s a considerable bonus that, as clients grow older, it can be turned to help plan a more comfortable retirement and to achieve more of those long-held goals in later life.
The fact is that many retirees are sitting on mortgage free property which has brought a fantastic return on the initial investment over the years. What’s more, they’ve been able to live in their investment.
These are things that should be celebrated!
If similar returns had come from more traditional investments in ISAs or unit trusts, the accrued capital would be happily spent on things that people want and need.
Our earlier article shed some light on the emotional barriers that are prevalent when it comes to considering equity release and discussing the use of housing equity. It can often be seen as an uphill struggle for advisers and clients alike.
It’s also very common to hear the view that “I’ve spent years paying a mortgage off, the last thing that I want is to get into debt again”.
However, changing the perspective on this and framing the home as a successful lifetime investment that can be drawn upon to make life better can shift perceptions to a view such as: “I’ve spent years working hard to invest in my home, now my home can invest in me.” After all, when viewed as an asset, the home is unique in that you literally get the benefit of living in your investment. Of course, the home is much more than this. A typical equity release customer has a strong sense of emotional attachment to the family home and the community in which they live. Aviva recently completed some very interesting research into this area and intends to constructively challenge the sensitivities surrounding the use of accumulate housing equity by retirees.7
We want to help advisers to help their clients think about the possibility of using their home as part of retirement planning.
If more people had a more open mind about the home being an accessible asset, then retired life would improve for thousands – with all the social, psychological, and broader economic benefits that come along with this.
Today’s retirees are facing significant challenges to maintain their standard of living, whilst tomorrow’s retirees are seeing the promise of a comfortable retirement receding, or at best, having to save more and work for longer to achieve the goal.
However, the historic gains in house prices mean that potential in the later life lending market remains huge.
Fresh approaches will be needed so that thousands more people are able see the potential in the best investment they ever made and get to enjoy the retirement that they always looked forward to.
Perceptions need to be shifted and Aviva intend to be at the forefront of this.
Contains public sector information licensed under the Open Government Licence V3.0
1Office of National Statistics (ONS) – Life expectancy calculator.
2 Bank of England – when will inflation in the UK come down, February 2023.
3 Pension and Lifetime Savings Association (PLSA) retirement living standards study
4 Savills blog 18.03.2022.
5 HM Land registry public data
6 ONS - Property wealth in main residences by HRP age, Great Britain April 2016 to March 2018
7 Aviva behavioural research summer 2022