How important is housing wealth in retirement decisions?

10th April 2018
"If there is a need to use both pension and housing wealth to finance a retirement then the question becomes in what order?"

84% of household wealth in the UK is held either in pensions or homes. However, as the recent Office for National Statistics data shows what you see is not necessarily an indication of retirement wealth.

Retirement wealth should be measured by its ability to generate a reasonable income over the 20, 30 or even 40 years of retirement. If we look at retirement wealth as being a combination of pension wealth and housing wealth, where under each a household can have high wealth, moderate wealth, little wealth or no wealth, there are 16 possible combinations.

Pension wealth will normally be a combination of defined benefit and defined contribution entitlements. Low wealth will not generate a reasonable lifetime income when added to an individual’s State pension. So, a defined contribution fund of less than £15k is not going to generate sufficient regular income, leading to solutions that will involve other ways of drawing down their pension savings.

At the other extreme is where the value of pension savings is such that when added to a State pension it will generate more income than is necessary to cover regular spending. This could be a defined benefit pension in excess of £20k per annum; roughly equivalent to a defined contribution pot of £500k. Individuals with this amount of pension savings could be considered to have high pension wealth.

The amount of pension wealth if looked at in isolation dictates what the objectives are with regard to its use.

These objectives could however be influenced by the amount of housing wealth. Here low value means the possibility of obtaining a lump sum sufficient to augment other retirement income through downsizing and still owning a home. High value means that too much housing wealth is held and that inheritance tax issues are going to arise. For some in a single household this could be as low as £325,000.

Combine pension wealth with household wealth and some interesting retirement strategies begin to emerge. For someone with high housing wealth they could consider downsizing and using the proceeds before touching their pension wealth. They may even decide to draw down on their housing wealth and leave their pension wealth to younger dependants. The solutions will depend upon the relative amounts of pension wealth, and family circumstances.

Someone with high housing wealth and low pension wealth may decide to live off their housing wealth and use their pension wealth as a reserve to draw upon when emergencies occur, for example, the boiler needs replacing; or for special treats, for example, that golden wedding anniversary cruise.

If there is a need to use both pension and housing wealth to finance a retirement then the question becomes in what order? If the strategy is to downsize then should this occur earlier in retirement? In which case, would the strategy be to use a small amount of pension, then the downsizing proceeds, followed by the residual pension? If equity release is to be used this is likely to be after the pension savings have been utilised. If part of the pension wealth is a defined benefit pension the strategies may be different.

Advisers should be able to look at the 16 possible combinations and work out what strategies may be adopted and what the advice needs are. To many, pension wealth is pension wealth and housing wealth is housing wealth and never the twain shall meet. However, many - possibly a majority of retirees - will need to use the two in conjunction with each other.

This raises the question as to whether the current structures can deliver. How many advisers practice across all the retirement disciplines that such an approach requires? Is the guidance given by Pensions Wise too restrictive? Do enough pension providers facilitate all the functionality that there consumers require?

Housing wealth is not evenly distributed across the country, even across regions. Also some people are willing to move to another region to be able to maximise the housing wealth they can release to fund their retirement income. Others will not be willing to move from their family home.

These factors will dictate what solutions are available to whom in retirement.

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