Home is where the wealth is

Transcription

1 Home is where the wealth is Home is where the wealth is It s time for a better conversation about overcoming property myths For Financial Adviser use only not for retail customers 1

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3 Introduction What is our property worth to us? Home is where the wealth is It s an intriguing question, one which conjures up all manner of potential responses. A roof over our head. A home for our family. Safety and security. Something for our next of kin to inherit. But do we view property enough as a source of retirement income? It appears not. And yet the need for us to do so is becoming ever more acute. This report is designed to support financial advisers, in particular to aid conversations with clients in order to help them get the most from all of their financial assets. The move away from defined benefit pension schemes has left a generation of people facing a retirement savings gap. Long-term wage growth is flat. Talk is of a lost decade, and some predict we will still be earning less in real terms in 2022 than we were in However, inflation in the UK hit 3.1% at the end of 2017, a six-year high and up from 0% in If wage growth trails the growth in inflation, then contributions into defined contribution workplace pensions will not keep pace with the cost of living. Auto enrolment is helping a new wave of younger workers to start saving earlier, as contributions rise to 3% from April 2018 and 5% from April But with wage growth so slow they still may not be saving enough. Enter property The value of our homes has continued to rise. UK housing stock was worth 7 trillion by the end of and over-55s own an estimated two thirds of it 3. Predictions of plateauing house prices in 2018 will make little dent in this huge figure. However, in this follow-up to our 2017 whitepaper Home Truths, we have uncovered fresh evidence of barriers which prevent people from taking a more holistic view of the way property could provide an income in retirement. This is despite the fact that for many, property wealth tops the amount saved in pensions or other savings vehicles

4 Research conducted for this report finds that the majority of people do not want to downsize when they retire, instead preferring to stay in their current home throughout retirement. The desire to let property out in order to make an income has also diminished in the last year. Despite this, though, widespread support for and understanding of the ability to unlock some of the value of a property while remaining in it is low. Some of this low desire is based on misunderstanding, and some is based on psychology, as well as ingrained perceptions around what property is for. Our research identifies both an urgent need and a burning opportunity for financial advisers to help customers overcome these barriers. Advisers are, of course, hugely important in many people s retirement planning process. This report will arm advisers with new insights to support them doing that. 4

5 Property & retirement options Home is where the wealth is Many of those approaching retirement and thinking about their options for generating income will consider involving their property. For example, downsizing to release some capital, or entering the field of buy-to-let. But our new research reveals that these options have become less appealing over the last year. More people want to stay in their current property as they get old: 88%, up from 82%. At the same time, fewer people plan to downsize. Just 20% say they are likely to sell their property and move to a smaller one when they retire, down from 26% last year. Among over-55s it has fallen from 22% to only 16%. 20% in % +55s in % in 2017 Downsizing falls in popularity Downsizing falls in popularity Downsizing falls in popularity 26% in % in % in 2016 The move away from downsizing may be reflective of the fact that the amount received tends to be eroded more than expected by legal fees, stamp duty and the costs of moving. Further to that, many over 55s have yet to pay off their mortgage on their current homes. While, on average, people expect to clear their mortgage by age 56, 40% of over 55s and 61% of 45-54s have yet to do so. 40% +55s 61% Faced with the prospect of having little left over from their equity after covering the costs of downsizing and clearing their mortgage, and combined with emotional attachments, it is understandable that more people prefer to stay in their current home once they ve retired. 5

6 Home is where the wealth is The Retirement Account Buy-to-Let has fallen in popularity as well, likely due to new stamp duty surcharges on second properties and the removal of mortgage tax relief. 35% said they were likely to consider it, with 62% saying they were unlikely to a far cry from the even 49-51% split last year. The shift is even more pronounced for over 55s, with 10% saying they would consider it versus 87% saying they wouldn t compared with 27% and 73% respectively last year Would consider buy-to-let 35% 49% Unlikely to consider buy-to-let 62% 51% s 2017 Would consider buy-to-let 10% 27% Unlikely to consider buy-to-let 87% 73% 2016 Separate Retirement Advantage research in 2017 found that over-50s expect they will need 1,435 a month in retirement up slightly on the year before. But are we saving enough to achieve this? At 226,000 4, the average UK house price has doubled since Given the average pension pot is worth 50,000 6, plenty of couples could be sitting on equity worth more than their combined pension pots. Thinking of property as a store of wealth may start to become more appealing and more of a necessity. Income required Average house price Average pension pot 1,435/ month 226,000 50,000 4 ONS, UK house prices, November Aegon, UK Readiness Report, 2017 ( 6

7 Home is where the wealth is 1. Property is not being recognised for what it s worth We found that just over half of people recognise that their property equity is worth more than their pension, with 52% saying this. Interestingly, fewer recognise this is the case than last year (63%). Alarmingly, there has been a big increase in the proportion who don t know if their property is worth more than their pension, from 5% last year to 22% this year. A prevailing mood of uncertainty may explain this shift. Against the backdrop of Brexit, and the IMF predicting UK economic growth of just 1.5% 7 in 2018, house price growth looks set to remain flat 8. For the first time in some years, it is not a given that house prices will continue their upward trajectory.?? Property is more important than pension 52% Don t know 22% Pension is more important than property 18% Property and pension are even 8%

8 It is worrying if this rise in Don t Knows reflects a lack of engagement from those approaching retirement in assessing the value of their assets. Many could face a big shock on reaching retirement if they are making overly generous assumptions about their pension pots thanks to auto-enrolment. Recent research suggests there has been an increase in the size of average pension pots since the new pension freedoms came into force in 2015, but most pots will still be worth less than property equity 9. The rise in Don t Knows 22% in % in 2016 When it comes to what people expect their main source of financial support to be in retirement, over 55s still overwhelmingly expect it to be their workplace pension with 46% selecting that option. 18% of over 55s expect their state pension to be their main source of support; this is more than the 17% who selected property. 46% 18% 17% workplace pension state pension property When asked to rank these various sources of support in the order of how much they expect them to help, the substantial majority of over 55s rank their workplace pension higher than property (72% to 28%), and a majority even rank the state pension higher than property (58% to 42%). Workplace / personal pension Property State pension Personal savings s 42% 46% 19% 17% 16% 18% 14% 12% 8 9

9 Home is where the wealth is This view is shifting across generations however. When asked if they expect property to provide them with some level of financial support in retirement, 45% of over 55s agreed with that statement. Among year olds though, 62% agreed. When asked about the state pension, the trend moves the other way: 40% of year olds agree it will support them compared to 57% of over 55s. Do you expect your property to provide you with some level of financial support in retirement? Do you expect your State pension to provide you with some level of financial support in retirement? +55s s % yes 62% yes 57% yes 40% yes Property is becoming a part of the retirement income equation indeed, it looks as if younger people are already factoring it in but much progress still needs to be made. The fact that younger generations already expect property wealth to be a source of support in retirement may even make it easier for those nearer to retirement (who may think younger relatives will react badly to the idea) to embrace it too. 9

10 2.Barriers to using property are based on misconceptions We know most people want to grow old in their existing property - and keep control of it. However, there remains, among some, either a lack of awareness or misunderstandings which are putting them off options they think will jeopardise that wish. When we last asked in 2016, nearly a third said they would not use products like equity release as they did not want to lose control of their property, or wanted to pass their property on as inheritance. At the time we said it was important to combat these myths, as equity release does not affect either. These misconceptions are still widespread. This year we found: 24% said they wouldn t use equity release as they didn t want to lose control of their property. 22% wouldn t as they didn t want to lose ownership of their property. 16% wouldn t as they want to pass on their property as an inheritance (24% of over 55s). 4% wouldn t as they don t want to have to leave their property. 3% wouldn t as they think they ll end up owing more than their property is worth. 10

11 Home is where the wealth is With avenues such as downsizing and buy-to-let falling in popularity, it is a worry that unfounded fears like these are holding people back. These beliefs are cross-generational commentary on this issue has suggested that next of kin are a common barrier for many who would consider equity release. Bringing children into the retirement income conversation sooner can help allay fears around the role property can play for those fearful it will see them receive nothing from their parents inheritance. We know that equity release is growing in popularity despite this. Lending broke the 3bn mark in 2017, smashing the previous record of 2bn the year before. At the same time, evidence shows that pensions and other savings will not meet retirement income aspirations. This creates a need for more people to get used to exploring property as a means to reach their desired standard of living. 11

12 3.Property myths affect what we do with it Most homeowners plan to leave their property to their next of kin. Only 14% said they either don t plan to, or don t have any next of kin. But just 15% overall, and 11% of over 55s, expect their next of kin to actually move in and use the property as their family home. In comparison, 59% said their relatives would likely sell the property (66% of over 55s). Moreover, only 22% (10% of over 55s) said that it was important to them that their next of kin move in or hold onto the property. These findings raise an important opportunity for advisers to help their customers view their property holistically, and break down the barriers whether psychological or based on misunderstanding that stop them considering all the options available to them. An example of one of those options is that downsizing could present an opportunity to provide next of kin with an immediate lump sum (as well as providing retirement income). Another is that buy-to-let properties could offer next of kin extra sources of income, or a windfall if they decide to sell. Likewise, unlocking wealth from a property while still living in it need not scupper inheritance plans. But we have found evidence that some think it could. 24% of over 55s told us they would not use equity release to provide money for their retirement because they want to pass the property on as an inheritance. These are not mutually exclusive acts, and more retirees could reap the benefits of releasing property value in this way if this misunderstanding is corrected. Viewing property as a store of wealth is key to a rational exploration of the ways in which it can support retirement. Our research suggests that we are better at thinking in this way when we think about property as inheritance, than when thinking about our own later years. Advisers can help clients remedy this and get the most out of their property in retirement, depending on their particular needs and financial situation. 12

13 Home is where the wealth is Our findings suggest that people will consider property dispassionately when thinking about the future but not necessarily while they live in it. 58% said they would sell a property if they inherited it from a relative, with just 24% saying they would keep it in any way 16% said they would let it out, with just 5% saying they would move into the house and 3% saying they would use it as a second home. But when we asked the same to those who have already inherited property, 43% said they kept it. 19% said they moved in four times as many as said they would intend to. 15% said they used it as a second home and 9% said they let the property out. The emotional pull of property, once owned, is strong. 13

14 4.Retirement conversations should be a family affair In our last property report, Home Truths, we emphasised the importance of involving family in retirement planning discussions. However, research this time round finds that 25% still do not discuss their retirement finances with any family members. This goes up to 29% among over 55s. Crucially, only one in eight (13%) said they discuss their retirement finances with their children just one in seven (14%) over 55s. Changes to pension rules and long term demographic trends have taken us away from a simple pension for retirement, property for inheritance way of thinking. There are now many more options for different pots of wealth to help in different ways. For example, a lump sum from downsizing or an equity release loan could be gifted as an early inheritance. However, this new world of options naturally brings complexity. For that reason, bringing family and particularly children into discussions about retirement planning helps everyone agree what the priorities are and can hopefully reduce the risk of emotional upset if decisions are not understood and misunderstandings are allowed to fester. Financial advisers are in a unique and important position to facilitate these family discussions. 14

15 Home is where the wealth is Which family members do you discuss your retirement finances with? (Select all that apply) Overall +55s 67% 64% Spouse Spouse 13% 14% 8% Child(ren) 5% Child(ren) 1% Sibling(s) 1% Sibling(s) Grandchild(ren) 3% Grandchild(ren) 2% 25% Other 29% Other I do not discuss my retirement finances with any family members I do not discuss my retirement finances with any family members 15

16 Recommendations for advisers The retirement landscape changes constantly, driven by new rules as well as demographic and cultural trends. Against this backdrop, the emergence of property as a valuable store of retirement income has been remarkable. Yet, we have uncovered further evidence of barriers to using property to help fund retirement. Some of these stem from simple misunderstandings, and some from profound emotional connections with what our homes mean to us. Rather than ignoring those barriers, we should understand them and then work to overcome them. Financial advisers occupy an important position in this process, and can play a role in helping retirees get the most from their property as well as other assets. Based on the findings in this report, we set out three recommendations for advisers to help clients recognise that home is where the wealth is. Not all options will be right for everybody, but if homeowners can consider each of them clearly and rationally, their chances of securing a better outcome in retirement will be greatly increased. 1. Look for opportunities to bust popular myths with clients Evidence shows that misunderstandings around property value compared to other assets, the ability to unlock wealth from property and remain living in it, and other safeguards around products like equity release, continue to affect decision-making. Establishing the facts early on can help to remove lingering doubts and build support for all the ways property can provide income in retirement. 16

17 Home is where the wealth is 2. Explore whether clients attachment to their property changes, depending on the conversation Our research has found that most people recognise their next of kin won t live in the homes they leave to them. The barriers to accepting that next of kin will sell the property, or let it out, are small compared to the barriers to the owner tapping into their property s value first, to support their retirement. But the latter needn t jeopardise the former. 3. Encourage clients to bring their children along to conversations about retirement Only 14% of over-55s currently involve their children in retirement decisions. We know from talking to financial advisers that often children are sceptical of products which allow their parents to unlock some of the value in their home or that retirees are wary of undermining what they plan to leave as inheritance. In either case, getting next of kin involved can help address misconceptions and give real peace of mind. 17

18 About Retirement Advantage Retirement Advantage is a well-established company that can trace its roots back to We provide those who are in, at or approaching retirement with a range of simple, secure and flexible products to suit their needs. Every year thousands of retirees rely on us for their income. We have over 2billion of funds under our management, and a heritage dating back over 160 years. In January 2018 Retirement Advantage became part of the Canada Life Group (UK) Limited. Canada Life shares a similar heritage, and just as importantly, places the same emphasis on providing outstanding service to customers. Canada Life has operated in the United Kingdom since Today the Group offers life insurance, critical illness cover, retirement planning, annuities, investments and inheritance tax planning, looking after the needs of thousands of individuals and companies. Canada Life is itself part of Great-West Lifeco, with over 30 million customers worldwide and 760 billion in assets under administration. As part of Canada Life, Retirement Advantage has more capability than ever before to help customers feel better equipped to make the most of their retirement. 18

19 Methodology Home is where the wealth is The research featured in this report was conducted with 1024 consumers via research firm Censuswide in November and December Contact us Address Retirement Advantage 110 Cannon Street London EC4N 6EU Web Advisers: Customers: Phone am to 5pm Monday to Friday All calls may be monitored or recorded to help with staff training and quality control. Follow Retirement Advantage on: Twitter: or find us on Facebook: or even LinkedIn: 19

20 Retirement Advantage is a trading name of Stonehaven UK Ltd. Authorised and regulated by the Financial Conduct Authority. Registered in England and Wales. Registered number: Registered office: 110 Cannon Street, London, EC4N 6EU /18 20