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Andrew Tully: The pensions vs property debate needs more public attention

Andrew Tully White background 700

Some retirees in the near future are going to end up with little or no savings in their later years.

It is no secret average life expectancy is increasing, fewer people are able to rely on defined benefit schemes and the pension freedoms are encouraging more to access their pots at an earlier age.

At the same time, an increasing number will have to make at least some contribution to what can be a hefty social care bill. Taken together this means many will simply not be able to afford their retirement needs.

That is, unless they tap into their property wealth. Many approaching and in retirement have significantly greater wealth within their home than in their savings pots. Historically, people view their home as an asset they want to pass to family. However, times are changing and the old view that retirement income is based largely on pension savings simply will not deliver for most.

The freedom and choice reforms also change the tax dynamic between pensions and property. Property is included within inheritance tax calculations, whereas pensions can be cascaded through the generations free of IHT.

So it has never been more necessary to consider property within overall retirement planning.

There are two main ways to derive money from property: downsizing or using equity release.

A taxing trade-off

Recent research we undertook shows fairly muddled thinking among consumers on the topic. Eighty-two per cent of people want to grow old in their current property but 26 per cent think they will downsize when they retire.

One in five will not consider equity release because they mistakenly think they will lose control of their home, while over half say it is not normal to take on debt in retirement.

Many have deep emotional attachments to property and exhibit bias in financial decision making. For example, it was interesting to note that when asking over 55s if they would like to continue to live in their current “home” as they grow older, 61 per cent strongly agreed. However, when we asked the same question using the word “property” instead, the figure dropped to 48 per cent. We need to understand this if we are to help clients rationally consider all of their options.

The downsizing route can bring difficulties. The amount of money generated can be less than first thought and it will often come with significant upheaval. The increasing numbers of people
who still have children living with them throughout their 20s also makes this more complicated.

Meanwhile, the equity release market is growing rapidly, with lending last year estimated to have reached £2bn for the first time. Due to this rapid growth, and in response to altering customer demands, the sector has undergone big changes over the past few years.

For example, the introduction of capital and interest-style products. These allow people to pay off some of the interest and capital each month, reducing the build-up of debt. Fixed early repayment charges are another development.

Not just a last-resort

Equity release is often seen as a last-resort option but conversations around retirement, pensions and property need to happen much earlier in life.

And, crucially, some preconceptions need to change. Many are keen to pass their home onto their family but the recipients usually just sell and split the proceeds. Leaving an inheritance is becoming more about passing on wealth than leaving a specific physical asset.

Lower pension provision, the growing need for social care and wider demographic trends mean more people should consider how wealth tied up in property can be part of their retirement solution. Encouraging an approach encompassing all assets is not just sensible, it is a necessity.

Andrew Tully is pensions technical director at Retirement Advantage


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