The vision of heading into retirement with a healthy pension and happily doing all the travels and extreme sports you never quite got round to in your working life, is on shaky ground these days. With more people living for the moment, saving for a deposit on a first property is enough to make people’s blood pressure head skywards, let alone factoring in the word ‘pension’. Yet, these two things seem to be ever-more interlinked, as people continuously see the housing boom as the route to a prosperous retirement.
However, warnings are beginning to appear as research by In Retirement Services suggests one in 10 people are relying on borrowing against their property as a substitute for pension planning.
A crisis to be addressed
The study shows that in order to secure a pension of £20,000 from a family home at the age of 65, the property would have to be worth in excess of £1 million at today’s prices. Just an estimated 89,000 properties are worth over £1 million.
In addition, the Office of National Statistics (ONS) shows the UK Household saving ratio in Q1 2007 has fallen to just 2.1 per cent, the lowest level since 1960 and the austerity of post-war Britain. The ONS statistics also revealed that the number of employees paying into private sector pension schemes has sunk from 5.7 million in 2000 to 4.4 million last year.
Jason Hollands, of F&C Investments, warns the government must address the crisis in personal savings, and says: “Between 1979 and 1997 the UK Household Savings Ratio averaged around 9.5 per cent but since then it has averaged less than 5.5 per cent. With rising life expectancy, it is critical that action is taken to encourage people to save for their retirement.”
Hollands cites a combination of easy credit, reduced tax incentives, benefit traps, poor financial education and mistrust in the financial services industry as a ‘cocktail of reasons not to save’.
An uncommitted attitude
The shift in attitude towards money and debt is nothing new perhaps but it’s increasingly noticeable. The personal debt mountain continues to grow inexorably and currently amounts to over £1.3 trillion.
Ashley Clark, director of Need An Advisor.com, feels the government has done nothing to help the situation by proposing to introduce pension simplification, giving them greater flexibility and allowing residential properties to be part of pension funds, and then back tracking on the proposals, while imposing heavy tax penalties on not buying annuities.
He says: “People are realists. I’ve never seen a client that has said their property is their main pension and I’ve been in this business for 20 years. The consumer is more educated than the government gives them credit for. They have an asset and they are taking advantage of it with the equity release products now available. I think this is to improve their retirement rather than rely on it completely.
“The government relies on people having a property as a pension and care fund. The government is not committed to pensions. Labour killed the final salary market.”
For Clark, the only way forward is to educate the very young, as anyone over the age of 15 is indoctrinated in their way of thinking about money and a lost cause. “The government has realised it’s the next generation we need to do something about. We need to educate our young children of four and five to prepare them for life, and the government needs to re-introduce some of the pension flexibility that it was going to offer and subsequently withdrew.”
Remaining realistic
For Dean Mirfin, business development director at Key Retirement Solutions, consumers must remain realistic about the need to release equity from property in retirement due to the continuing issues of affordability. Yet, he adds: “I’m not an advocate of people relying on property as the mainstay for their pension. If some people are assuming property will fulfil their needs, they need to do their maths. There is no substitute for proper pension planning.”
However, Mirfin believes people cannot be blamed for turning away from pensions when they see plans being wound up and people losing their benefits. “A pension is the most tax-efficient way of saving. There are issues about taking an annuity at 75 and that puts many people off, but we have to accept that a lot of people are pushed to buy. Renting is expensive and it can be cheaper paying a mortgage. The situation is not clear cut or straightforward.”
The pension pill is a hard one to swallow when you’re young and with the British property obsession showing no signs of abating, it’s unsurprising that people see bricks and mortar as such a good way of funding retirement. Saving for a deposit seems to make more sense than putting away for a pension that you won’t see for 40 years. Yet, there is no doubt that relying on property completely is a foolish move and the current generation is in trouble if it continues to think in this way.
There is no easy solution to this problem, but educating the next generation seems like a good start, even if the rest of us have to learn how to save our coffers in old age.
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