In a Treasury committee meeting last week Phillip Hammond said he was concerned about the savings ratio in the UK. When asked to diagnose this particular problem he noted that housing wealth plays an “extraordinary role” that is “bizarre” and “distortive”. The Chancellor added the UK will need to look at the role of housing wealth when it comes to saving.
This is an issue that needs to be addressed sooner rather than later. Recent research from Old Mutual Wealth and Tisa showed that people aged 50 and over were approaching retirement with a funding shortfall of £11,400 per year. These generations are increasingly looking to their houses to fill that hole in their retirement funding; when asked if the home should play a role in financial planning, 68 per cent of the 1,000 surveyed said yes.
However, relying on your home in retirement is difficult. It’s not just a pile of money sitting in an account ready to be accessed. It’s the place you live. The care home rules, recently raised here by Paul Lewis, illustrate the problem. Currently, the rules state that whether or not the government pays for an elderly person’s care is dependent on their wealth. The government will ignore the value of the resident ’s home as long as their spouse or partner – or any elderly relative aged 60 or more – lives in it. So the house is sometimes considered part of the person’s wealth, but sometimes it’s a necessity that cannot be disposed of, so it’s not.
To access their housing wealth to fund retirement most people have to sell and then buy a smaller home. This tends to be a complicated and generally not overly profitable endeavour.
Another less popular option is equity release. Our research revealed that just 14 people out of the 1,000 surveyed would consider using equity release as a means of boosting retirement income. The results also showed that despite two-thirds claiming to know what equity release is, the majority could not answer basic questions on the subject.
There are multiple reasons for the lack of people engaging in equity release. Part of it is down to its sordid past. The public has heard horror stories of people leaving behind them huge amounts of debt that their children have to clear. However, times have changed and with the proper advice equity release can be a sensible option.
Equity release is also somewhat unpopular because of the emotional connection to a home, adding yet another layer of complexity to the issue. There is a pride in owning one’s home and a large portion of people work hard throughout their life to pay off mortgages. The emotional connection to the family home also makes older Britons less willing to explore the financial opportunities of digging into their housing wealth to help pay for their later life.
Bringing advisers to the table
However, to some extent a large portion of the elderly already use their house to pay for care, albeit in an informal manner. Throughout the country older people are recipients of informal care, such as shopping, cooking or cleaning, from their family or friends. In many cases this is part of an implied contract where the house will be the reward for the on-going financial and social support. So in these cases the house is already being used as a financial resource.
With all these political, financial and even emotional complications when it comes to housing wealth it is clear that people need help. Today neither guidance services nor advice considers using the home as an asset in retirement. This needs to be addressed by government and the FCA swiftly so people have time to plan and can enjoy financial wellbeing in retirement.
The Chancellor is right to bring attention to the role of housing wealth in UK savings. The first step to addressing the situation is giving people access to advice on their housing wealth. Keeping money locked away in your home seems like a safe and secure way to save, but accessing that safe is a complicated endeavour.
Gower Wisdom is product director at Old Mutual Wealth