21 March 2018
‘My house is my pension’ may seem a viable option when it comes to planning for retirement, but data suggests the prospect becomes less attractive as retirement actually approaches. Alex Waite explores the possible perception gap here, and analyses the pros and cons of treating a home as a pension.
More than one in five British adults say that they intend to sell their home, downsize and live off the profits in retirement. However, only one in seven believe that most of the retired people they know have actually used the ‘my home is my pension’ strategy. Clearly there is a significant gap between perception and reality, and of course there are merits and drawbacks to this strategy.
And let’s face it: having a house as a part of retirement funding would be a challenge which many millennials, who are concerned about getting on the property ladder in the first place, would probably be very happy to have to manage. So, to dive in a bit deeper, it’s worth exploring this perceptions gap, as well as some of the pros and cons of treating your home as a central part of your pension strategy.
Firstly, the housing market in the UK has proved to be relatively stable. When it comes to long-term investments, few ‘assets’ hold value as dependably as a house, giving good protection against inflation too.
For those looking to make their first steps onto the property ladder, the UK economy provides good conditions for borrowing right now. Saving has been less heavily incentivised in recent years, due to fiscal policy, so investing in property (with or without an eye on retirement) can easily seem more prudent than topping up a pension pot. That pension pot will not, for instance, keep a roof over your head in the short-term.
With millennial decision-making typically more transient than previous generations – short-termism can be attributed to reduced job security and to social media, as much as anything else – it is not surprising that decisions are often being made primarily for the “here and now”.
Also, property has an intrinsic value. “Bricks and mortar” constitutes a real asset – physical and tangible – as opposed to only having a number on a computer screen.
Planning to downsize in later life also makes a lot of sense. It is a perfectly logical step to expect to be taking. People typically require less space in later life – for a variety of reasons including children flying the nest, and the reduction in physical mobility that age can bring.
Putting all of your (nest) eggs into one basket, rather than working on a more diversified financial savings strategy, runs the risk of leaving limited room for manoeuvre come retirement. Large increases in interest rates in future years could make mortgages (and houses) a luxury item again making it less liquid when called upon to pay for retirement.
The ultimate goal, of course, is greater flexibility for people to enjoy their post-work life (whether that is through the ability to travel, or to pursue a dream project, or even to continue working part-time or on a voluntary basis). No one wants people to be hamstrung by a lack of prudent planning when they were younger. For the most part, we regret the things we didn’t do, more than the things we did!
Bridging the perception gap
The first perception gap driver is the evolution of one’s own differences in viewpoint over time. It’s no secret that-like political leanings financial planning positions vary and morph with age.
For example, it is very easy for an individual in their thirties to plan to use their house as their pension. However, this decision fails to take into account the strength of attachment people will increasingly have to their hard-earnt home as they get older.
An unwillingness to part ways with what is, for most people, their biggest lifetime investment, is understandable. This investment is one which people are likely to have devoted much time, attention and loving care to improving, as they transform their house into the perfect home. It is also borne out by the data: far more of those aged 55 and over (44%) said they do not plan to rely on their home as their pension.
Whatever the reasoning, it is clear that the ‘my home is my pension’ strategy is not a foolproof retirement plan. Progress has certainly been made towards giving savings strategies more consideration, but LCP research shows just how much further there is to go. There remains far too high a proportion of UK adults for whom long-term financial planning is not a priority at all. One third of pre-retirement age people indicate that saving into a pension is not an important financial commitment for them at present.
Despite UK economic conditions providing an environment that makes borrowing more attractive than saving (at least at present), an over-reliance on home ownership as a sole or primary means of retirement remains risky. Thinking ahead and trying to factor in potential changes in attitude towards the home is vital. Don’t let a short-term strategy hamper you in retirement.