Property wealth: An alternative form of pension planning

Retirement income does not need to be solely derived from pension savings, argues Andrew Tully.

The latest data from HM Revenue & Customs shows £9.2bn has been flexibly accessed from pensions in the last 18 months, with an average of three withdrawals per person of around £6,000 each.

These numbers are no doubt evidence pension freedom is working on one level, but I can’t get rid of a nagging feeling that all might not be well.

Unfortunately, we do not as yet have one sufficiently reliable data source which tells us where on the retirement journey these people are, what other savings or pensions they might have, or indeed what they are doing with the money.

Is it to pay themselves an income, make home improvements, or help children on the housing ladder by way of a house deposit? It may well be a combination of all three, but the reality is we won’t know for years whether the pension freedom experiment has worked well for all retirees.

It does seem clear some people will end up with little or no savings or retirement income in their later years. We know average life expectancy is increasing, while fewer people will be able to rely on defined benefit pensions.

Pension freedom is encouraging more people to withdraw money from their pension at earlier ages, and drawdown is no longer the preserve of the wealthy.

The average drawdown pot of £52,700 is less than the average annuity value of £52,900. More people will also be expected to make at least some contribution to what can be a hefty social care bill in the future.

All this combines to suggest many more people will not be able to cope financially with their retirement needs in the future.

Property wealth

This all sounds incredibly depressing, but there is light at the end of the journey in the form of their property wealth.

Many people approaching and in retirement have significantly greater wealth within their home than in their pension and savings pots.

Yet we often view our home as an asset which we want to pass to family, while living off our pension and savings.

Times are changing and we need to challenge the view that retirement income is based largely on pension savings. For many, it simply will not deliver a decent standard of living.

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

Whether it is due to need or as part of tax planning, it has never been more necessary to consider property within overall retirement planning.

Generating cash

There are two main ways to derive money from property: downsize to a smaller property, or use equity release to release cash from the home without having to give up ownership.

Downsizing may generate less money than first thought, and it can come with significant upheaval and often the need to move to a different area, away from friends and family.

The increasing numbers of people who still have children living with them through their 20s can also make this option more complicated.

Equity release is another alternative and this market is growing rapidly, with lending in 2016 estimated to have reached £2bn for the first time, according to the Equity Release Council.

Due to this rapid growth, and as customer needs and demands alter, equity release has undergone some significant changes over the past few years. For example, the introduction of capital and interest style products allowing people to pay off some of the interest and capital each month, reducing the build-up of debt.

The old world view that our retirement income will be based primarily on our pension, simply will not deliver for most people anymore. Lower pension provision and wider demographic trends mean that clients should consider how wealth tied up in assets such as property can be part of the solution.

Andrew Tully is pensions technical director at Retirement Advantage