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Expectation vs Reality: Older homeowners face £17,984 retirement income shortfall

04 March 2020

Older homeowners are anticipating they’ll need an annual retirement income of £35,1961 - a sum 16% higher than the average income of a full time UK employee and more than double today’s average of £17,2122. This ambitious expectation is leaving a potential shortfall of £17,984 a year.
A new report published today by the Equity Release Council and Key – The pension / property paradox: moving beyond tunnel vision in retirement planning – shows that pension pressures are set to rise as many people access their savings early while generous final salary pensions are expected to be extinct for most people by 20503.
The challenges of rising living costs (30%), prioritising mortgage repayments over pension savings (24%) supporting financial dependents (22%) and earning less money so unable to afford to save more (24%) are all cited as reasons why homeowners over-55are unable to increase their pensions savings.
Not only are these factors impacting on pension contributions, but they are prompting the early erosion of savings pots, as one in six (16%) homeowners aged 55+ who are yet to retire have, or plan to, dip into their pension savings early.
Table one:  Most common reasons over-55 homeowners - who have maintained or decreased the amount they save into their pension and are not yet retired - are unable to increase pension savings before they retire

Cannot afford to due to a rise in the cost of living 30%
Believe they are saving enough already 29%
Prioritising paying off a mortgage over saving into a pension 24%
Earning less money so cannot afford to save more ​24%
Still have financial dependents so cannot afford to save more 22%
Not planning to retire soon so have time left to save 22%
Source: Equity Release Council, 2020
This reality gap among homeowners aged 55+ comes at a time when pension income growth has stalled, increasing by just £7 a week over the last decade4, and savings pressures are escalating across the UK, which is already home to western Europe’s largest increase in pensioner poverty since 19865.
Yorkshire and the Humber is home to the greatest reality gap, with older homeowners in this region likely to see a shortfall of £27,723 between what they anticipate needing and the retirement income they’re likely to achieve. Followed by London (£19,856) and the South West (£19,531).
Table two: reality versus expectation in retirement income across the UK
Region Average Gross Annual Pension Income for Single Retiree Income Older Homeowners Expect to Need Per Year Shortfall
Yorkshire and Humber £15,964 £43,687 £27,723
Greater London £17,784 £37,640 £19,856
South West £19,448 £38,979 £19,531
North East £17,784 £36,556 £18,772
Scotland £17,420 £35,072 £17,652
East of England £16,380 £33,746 £17,366
Wales £17,056 £33,963 £16,907
South East £19,032 £34,967 £15,935
East Midlands £17,212 £32,993 £15,781
North West £17,784 £33,500 £15,716
West Midlands £17,004 £29,621 £12,617
Source: DWP Pensioner Income Series, August 2019 and the Equity Release Council, 2020. Income older homeowners expect to need per year calculated using midpoints and based on respondent’s estimates of spend each month.   
Mortgages and pensions compete to be top priority
Valued at a combined £11.21 trillion6, private pensions and property account for more than three quarters (77%)7 of household wealth. They are the two biggest sources of wealth in the UK, the fastest growing and consistently ranked top in public perceptions as the safest ways to save for retirement8.
The report shows paying off a mortgage often competes with retirement savings to be older homeowners’ biggest financial priority – stifling pension contributions and increasing the likelihood of people being “asset-rich, cash-poor” in later life.
Just over one in three (31%) homeowners who have increased their pension savings in the last year have been able to do so as they’re no longer paying off their mortgage. Among those who still have a mortgage, almost half (44%) report that paying off their mortgage has, or is likely to, limit their pension savings potential.
Property wealth in the blind spot despite its potential 
Property wealth holds significant untapped potential to help close the retirement income gap. The average homeowner in England and Wales could access £88,290 from their property via a typical equity release plan – equivalent to over a decade of state pension payments9.
Yet despite this appetite, bricks and mortar remain in the blind spot when it comes to retirement planning. Just one in five (19%) older homeowners who have sought information, guidance or advice on later life finances were prompted to consider accessing property wealth as an option – highlighting a disconnect between the choices they are presented with and the wealth or assets at their disposal.
David Burrowes, Chairman of the Equity Release Council, comments: “With the UK’s population ageing rapidly, the scale of this issue is only set to become greater. An increasing number of consumers must make their pensions savings last over longer retirements with property wealth fast emerging as a viable solution to help meet this funding challenge.
“Our report emphasises the pension pressures faced by many across the UK and calls for property wealth to be better considered and integrated into the advice process. A single-product solution to retirement planning is no longer fit for purpose. We must break down the silos that create tunnel vision when it comes to later life financial planning.”
Will Hale, Chief Executive Officer of Key, comments: “Today’s report shines an interesting spotlight on an issue that the vast majority of us will face at some point in our lives.  How do we juggle our financial responsibilities as we age in such a way that allows us to increase our pension contributions and achieve goals such as paying off our mortgages?  Sadly, there is no simple answer to this particular question – especially with the slow death of final salary schemes but an increase in longevity.
“However, to me this report suggests that we should be asking an entirely different question -how can we use all our assets to help us achieve our wants and needs in later life?  While even the boost provided by using residential property, investment and savings as well as pensions might not help everyone achieve a retirement income of over £35,000 – which is higher than the average UK salary – it will certainly help. 
“Indeed, taking a holistic approach to retirement planning and ensuring access to good specialist advice will mean that more people are able to enjoy a comfortable retirement.”
To overcome tunnel vision in retirement planning, the Equity Release Council and Key are calling for:
  • The Money and Pensions Service (MaPS) should signpost retirees to consider home finance options and later life lending products as part of a joined-up retirement planning approach – promoted via a public information campaign. This should include tailored guidance based on people’s life experiences and circumstances – recognising the impact of events such as divorce, separation and caring responsibilities on individuals’ retirement prospects.
  • The Department for Work and Pensions should build on the Pensions Dashboard initiative to facilitate a broader retirement dashboard that supports a holistic view of all assets and options.
  • The Financial Conduct Authority, should continue to see how best to break down siloes within the regulatory framework, which create an increasingly artificial separation between specialist forms of advice and contribute to consumer safeguards in different areas of the later life market. The industry needs to lead the way on this by building stronger referral pathways to break down these siloes. This will ensure consumers consider the full range of available products based on their current and future needs, whatever their entry point to retirement planning conversations.
  • The adviser community needs to come together to aid learning and the passing on of experience to meet growing consumer demand. This includes working with regulators and qualifications bodies to embed and promote minimum standards of knowledge across the entire retirement income and later life lending space.
  • Government should appoint a Minister for the Elderly, who can ensure broader social and financial issues are recognised and co-ordinated across all Government Departments.
A cross-party later life commission should be established to help meet the long-term needs of people in later life, including via the potential uses of property wealth and balancing intergenerational needs.

Page last updated: Thursday 23 December 2021