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An Englishman's home is no longer his castle, it's an asset
Pensioners will have to consider their property as an income stream in order to afford the costs of later life.
by Michelle McGagh on Feb 27, 2013 at 13:50
Forget leaving the house to the kids, property must become part of your retirement assets if you want to bridge the pension shortfall.
In 2010/11, 1.7 million pensioners’ disposable income was below 60% of the average household income meaning 14% of all pensioners were in the Department for Work and Pensions (DWP) definition of relative poverty.
However, 60% of pensioners who sit below the poverty line own their own home outright and the over-65s are sitting on a combined property wealth of £750 billion.
This means that pensioners are sitting in expensive properties but struggling to pay their bills; they are asset rich but income poor. Some pensioners are trying to make the most of their homes and turning to equity release to try and bridge the gap between income and expenditure.
Equity release is a way to release money from your home, by essentially taking out a lifetime mortgage that is paid out as a lump sum or as a monthly income.
Although equity release is relatively underused as a way to boost income, a report by Just Retirement and Oxford Economics shows that it could make a significant contribution to boosting people’s income in retirement. The report projects equity release could lift over one million pensioner households out of poverty for a year between 2012 and 2040.
Steve Lowe of Just Retirement said equity release money was not being squandered on cruises but was being used to live.
‘This is not income for frivolity but to bridge the income gap [created by under-saving into pensions],’ he said.
Sam Moore of Oxford Economics believes the need for pensioners to use the property assets in retirement will be an on-going trend thanks to increasing life expectancy, cuts in government spending and the end of defined benefit (DB) pension schemes in favour of defined contribution (DC) schemes.
‘Someone retiring today can expect to live for 20 years and that can be expected to grow. Six million people aged over 50 have no pension plan. Those in DC schemes are making contributions of less than 10% [of salary] when they need to make 15% to create 70% of pre-retirement income,’ he said.
‘Equity release could play a role in providing income in the future.’
Future of care
Gemma Tetlow of the Institute of Fiscal Studies said there was significant wealth tied up in property that would need to be accessed as the government forced people to take more responsibility for their old age.
‘There is increasing pressure on the individual to provide funding [for old age] themselves,’ she said.
‘The house holds quite a lot of people’s wealth. That could subsidise income streams…people may start to use their house in those ways if it is a choice between living on a low income or living a better lifestyle.’
Long-term care is one area where the government is forcing people to look at their funding options. Although it has placed a cap on care costs of £75,000 and increased the means-testing threshold for care to £123,000, there will still be significant individual costs.
Baroness Sally Greengross, chief executive of the International Longevity Centre, said older people should be more willing to use their assets to pay for their later life and that being having to sell a home to pay for care was not a problem.
‘A large number of people will need money to pay for care…There is a paternalistic attitude towards older people,’ she said.
‘The [new care] policy is to prevent people from paying for their care but if you have a property that is sold after you are dead and your kids get less [inheritance] that does not seem like such a bad thing.’
Assets on the table
Lowe said there was an increase in the number of people looking at their property as an asset and a new attitude emerging in the ‘post-ration book’ era compared with those in the ‘pre-ration book’ era.
‘Post-ration book people have a different attitude. They want to live an acceptable retirement where as pre-ration book would live in poverty and pass the house down [to their children],’ he said.
Pre-ration book pensioners were also more likely to be dealing with more debt, and possibly even a mortgage, meaning they were in greater need of another income stream.
‘The house needs to go on everyone’s [financial planning] check list. The house is now being put on the table the same as a pension as people are looking at stretching out income.’
Greengross agreed that property wealth needed to be viewed as an asset rather than sentimentally.
‘I wish [property] would become part of people’s normal financial planning. There is a reluctance to do that.We need to change attitudes and stop ignoring how we will pay for care and
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