Carrying debt into retirement isn’t always bad news
As more and more pensioners will need to turn to housing wealth to fund old age, James Daley argues that perceptions around carrying debt into retirement need to change
Housing wealth will be the key to retirement for many
It’s well known that many people are not saving enough for retirement. Indeed, the latest report from the government’s Pensions Commission suggests as many as 15m people are under-saving – which is over a third of the working age population.
The picture is particularly acute for women – who are more likely to have taken time out to raise children, and who still suffer from the gender pay gap.
But new research from Fairer Finance provides some hope for this demographic. Of those women who reach retirement owning a home (around 75 per cent), they have on average as much housing wealth as single male households. And this could be the key to helping them have a better standard of living in retirement.
Our modelling found that of all single female homeowner households between the ages of 55 and 79, 65 per cent have (or are on track to have) a retirement income of below the Pensions UK moderate threshold. You can read up on exactly what Pensions UK deems as ‘moderate’ on its website – but it’s pretty much as the name suggests. It includes a modest £59 a week on groceries, £11 on takeaways, a couple of streaming services and a two-week holiday in the Med each year.
But while nearly two-thirds of single female homeowner households won’t have enough income to fund even this moderate lifestyle – they are sitting on an average of over £200,000 of housing wealth. Some have considerably more.
Unfortunately, the Fairer Finance research also shows that perceptions about using housing wealth to fund retirement remain unfavourable. There’s a consensus that paying off your mortgage should be a key life goal and that carrying debt into retirement is bad news.
This is something we need to change. For many millions of people, their housing wealth will be the key to living a better standard of life in retirement. And for those who can’t release some of that wealth by downsizing – borrowing may be a sensible way to generate some extra income whilst keeping them in their beloved home. We need policymakers, regulators and firms to work together to overcome the barriers that are preventing people from seeing their pension and their property as part of the same financial picture.
Borrowing in retirement is on the rise
House price inflation has far outstripped wage growth in the UK over the last 20 years – so it’s no surprise that more and more people are carrying mortgages into retirement.
According to figures from the Financial Conduct Authority, a little over 92,000 people over 55 took out a mortgage in 2018. But by last year, that had risen almost fourfold to just under 365,000.
Our research found that only 14 per cent of homeowners aged between 55 and 79 would consider borrowing against their housing wealth to top up their retirement income. But over 50 per cent now think it is more acceptable to have a mortgage in retirement, and 38 per cent think that “people like me” will end up taking out a mortgage in later life.
This would suggest that perceptions are slowly changing and perhaps highlights people’s cognitive dissonance around the use of housing wealth in later life.
Intergenerational warfare
What are your children expecting to inherit? If they are hoping to end up with the family home, many may end up disappointed.
As Gen Xers reach retirement with inadequate pensions, but valuable houses, many will surely take the decision to access their housing wealth to ensure they can have an enjoyable retirement.
I want to be able to set my children up with a deposit for their first house if I can. But they’re unlikely to inherit in the same way that many of my generation have been lucky to from their Baby Boomer parents.
While this trend may not be great for inheritance tax receipts, hopefully it will create a more progressive society – with less wealth being passed down through the generations.
QUOTE OF THE WEEK:
“A very rich person should leave his kids enough to do anything, but not enough to do nothing.”
Warren Buffet
Succession planning
Inheritance is an emotive topic. Some people feel very strongly that the wealth they make in their lifetime should be passed down unencumbered to the next generation. While others like Bill Gates and Warren Buffet have set their minds to giving away as much wealth as possible. Too often, parents don’t have these important conversations with their children – often leading to family division after they die. With more people likely to be requiring their housing wealth to enjoy a decent standard of living in retirement it’s all the more important that families prioritise these conversations and set their children’s expectations while they have the chance.
James Daley is managing director and founder of consumer group Fairer Finance