This is a what came first, the chicken or the egg, conundrum.
It is common for individuals to retire, spend their pension savings too quickly then look to their housing wealth to bail them out. When I say they spend their pension savings too quickly, they spend at such a rate that they see their pension savings quickly disappearing. They do not need to be an actuary to realise that at the rate they are going, they will not survive another five years given the spending albeit they will probably live another 10 years or more.
Often overspending is caused by retiring with inadequate pension savings. For many it is an impossible task to cut their retirement spending down to the level their pension savings will sustain. Fortunately, around 70% of retirees own their home.
How many, when their retirement spending is seen to be unsustainable, put their houses on the market and look for something smaller and cheaper to run? If they leave it too late, they could be a forced seller and a forced buyer which is not a good position to be in. They may end up with a house that is inappropriate to their needs, which could cost them more in the long run.
If they turn to equity release, ignoring emotional attachment, will they remain in a house that is too large and costly for them to run? It is important that the equity release adviser is aware of this potential to ensure the correct product is selected.
We know that many people have inadequate pension savings. We know that many of those with inadequate retirement savings also own their homes. Yet what I describe above is the route that many will follow.
If they move to a smaller house they may not go near a financial adviser. They may just put the proceeds in interest-bearing accounts and use the income to supplement what pension savings they have left. In their Retirement Outcomes review, the FCA expressed concern about those who enter pensions drawdown yet end up investing their pension savings in cash. What is the difference between using the proceeds of moving to a smaller house for the purposes of augmenting retirement income and a pension drawdown fund? The common problem is that there is no one to ask the question, ‘Are you sure?’
If they do go to an adviser for equity release how much will the conversations revolve around the suitability of the house they are living in?
To assess the complexities that have to be addressed, consider this hypothetical conversation.
“I have a moderate pension, and an average sized house that I own with no mortgage. I have ceased working and have four years to State pension age. I would like to return to work but I am finding it difficult to find employment. What are my options?”
There are a multitude of lifestyle questions that affect financial planning. If I successfully find work before State pension age, different solutions will have to apply than if I do not. When do I decide that I won’t find work and have to accept I am retired? What will be the impact of my State pension on my income?
We know that the pension savings are inadequate to meet the lifetime spending of the individual. If they are going to call upon their housing wealth then when and how? Emotionally many people want to remain in their house, but what if it is costly to run, and will be in need of many modifications if the occupants age in such a way they need a more age-friendly home?
If they downsize how should they use the proceeds? It may be a good idea to keep the pension savings intact until the downsized proceeds have been used. On the other hand, if the house is suitable to live in throughout retirement and they are going to use equity release, is there an argument for using the pension savings first?
So many questions.
Is it fair to expect an adviser to solve these issues for the individual? I don’t believe it is. I would like to see the Money and Pensions Service redefine PensionsWise. It should be educating the majority who are approaching retirement as to all they should consider to get the best out of their retirement, and use what assets they have to deliver the best retirement possible.
This would include a conversation as to whether – when you are 88 suffering with acute arthritis – you should still be in your current home?
Then financial advisers, whatever we expect of them, can do the job they are good at, finding the right product for the client’s needs.
Bob Champion is chairman of the Air Later Life Academy