Baby boomers tap housing wealth to boost retirement incomes

Baby boomers are increasingly raiding the wealth tied up in their homes to supplement retirement incomes, research has revealed.

Since 2015, homeowners have used property wealth to deliver £13billion in extra income via equity release, according to analysts at investment platform AJ Bell.

Over the same period, since the start of pension freedoms, some £30billion has been flexibly withdrawn from retirement pots.

It means that for every £1 of money flexibly withdrawn from pensions in the past four and a half years, about 44p has been generated from property wealth using equity release, according the AJ Bell. 

Some £3.4billion of this figure was released via equity release over 2019 according to Key

But the surge in house prices over the past 25 years has tailed off significantly in the past decade and that has led experts to describe the boom in equity release as a ‘once-in-a-generation’ event.    

‘Baby boomers’, those born between 1946 and 1964, are more likely to have significant wealth locked in their homes than younger generations, which goes some way to explain the £13billion surge in released equity over the past five years. 

However, another driver could be the plunge in annuity rates since the late 2000s and the demise of final salary pension schemes. 

AJ Bell’s Tom Selby said: ‘Many of this generation have enjoyed both a house price boom and generous defined benefit pensions entitlement. 

‘Many will also be drawing on both, either through buy-to-let, equity release or downsizing in the case of property wealth, alongside other private pensions and the state pension, to provide a comfortable retirement income.

‘In many ways boomers have won the generational lottery and this almost certainly won’t be repeated for younger savers. 

‘Defined benefit schemes are almost extinct everywhere except the public sector, while young people often struggle to buy their own home. Even if they do, it is unlikely they will enjoy the double-digit price growth experienced by their parents and grandparents’ generations.

‘As a result, young people will likely need to set more aside today if they want to enjoy a similar retirement to their baby boomer counterparts.’   

Baby Boomers who bought in the 80s and 90s have seen the value of their homes skyrocket, as this chart of average UK house prices highlights

Baby Boomers who bought in the 80s and 90s have seen the value of their homes skyrocket, as this chart of average UK house prices highlights

The rate at which equity has been drawn from homes has accelerated massively over the past half-decade. 

AJ Bell senior analyst Tom Selby

AJ Bell senior analyst Tom Selby

Homeowners over the age of 55 withdrew some £3.4billion last year, according to separate research from Key.

Around 29 per cent of equity release borrowers used the cash to pay off loans or credit cards while 20 per cent was used to clear existing mortgages.  

Around two-thirds used some or all of the cash they released to improve their homes or gardens in 2019, while almost a third used the money to fund holidays. 

How are people using equity release? 

Homeowners released nearly £9.5million of property wealth a day last year with the average customer receiving £75,631.

Sales of drawdown plans – which allow borrowers to withdraw their loan in stages – accounted for 73 per cent of the equity release market last year compared with 64 per cent in 2018, according to retirement adviser Key.   

Over the same period, since the pension freedom reforms, over £30billion has been flexibly withdrawn from retirement pots, 

These changes, introduced in April 2015, give over-55s greater power over how they spend, save or invest their retirement pots. 

For example, they no longer have to buy  an annuity to access their income but can instead enter drawdown or take a cash amount.

One of the big concerns over the reforms involved people running down their retirement funds too quickly. 

Savers pulled 21 per cent more out of their pension pots last summer – cashing in an extra £400million. 

HMRC figures show a rising number of savers pulling a larger amount of cash out of pensions via flexible payments

HMRC figures show a rising number of savers pulling a larger amount of cash out of pensions via flexible payments

Flexible payments from pensions hit £2.4billion between June and September, HMRC figures. 

HMRC stats show withdrawals in June to September 2019 and how that compares to a year earlier

HMRC stats show withdrawals in June to September 2019 and how that compares to a year earlier

Selby added: ‘As we approach the fifth anniversary of the introduction of pension freedoms, much of the debate has understandably focused on people’s defined contribution retirement pots and specifically the sustainability of the withdrawals they are making.

‘But for most people defined contribution pensions are just one part of their retirement strategy, with many using a variety of assets to generate an income in their later years.

‘But this is likely to be a once-in-a-generation boom for equity release. 

‘Younger people are finding it increasingly difficult to get on the housing ladder, and even those who do are more likely to be lumbered with longer mortgage terms than their parents and grandparents.

‘Furthermore, it is highly unlikely the rapid property price increases that burnished the retirement wealth of baby boomers will be repeated in the coming decades.

‘Future retirees therefore need to factor in the possibility they don’t win the property lottery when building their savings plan as, in all likelihood, their house will not be their pension.’   

> This is Money’s guide to investing and living off your pension  

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