«September 2007 International Longevity Centre - UK The International Longevity Centre - UK (ILCUK) is an independent, non-partisan ...»
• An average 35-year old in 2005 had household mortgage debt of £88,000. In 1995, the average household mortgage debt of this cohort was £46,000.
• An average 40-year old in 2005 had household mortgage debt of £78,000. In 1995, the average household mortgage debt of this cohort was £50,000.
• An average 45-year old in 2005 had household mortgage debt of £62,000. In 1995, the average household mortgage debt of this cohort was £50,000.
Concurrent with this trend, the average household mortgage debt that individuals posses in different stages of the life course has increased. For example, in 1995 a typical 30 year old property owner had household mortgage debt of around £50,000; the equivalent amount for a typical 30 year old in 2005 was £94,000. Among property owners in the 20-29 age range in 2005, the average household mortgage debt was £97,000. The equivalent figure for this agerange in 1995 was £46,000.
Unsurprisingly, individuals have seen their household mortgage debt decline as they approach and pass the age of retirement. The cohort aged around 55 in 2005 was the youngest to see their household mortgage debt decrease over the period, from £37,000 in 1995 to £34,000 ten years later.
Interestingly, some individuals in retirement still have mortgage debt to pay off, which may or may not be the result of an active choice. For example, individuals aged 70-79 in 2005 still on average had around £2500 of household mortgage debt.
Net Illiquid Assets Adding together total illiquid assets and debt for all age-groups shows a strong upward trend for net illiquid assets.
The above chart shows changes in household illiquid wealth for all individuals. These findings are particularly noteworthy for the fact that although older cohorts have seen the greatest net increase in their household illiquid assets by amount, as a ratio to their equivalent assets in 1995, it is in fact younger cohorts that have seen the biggest increase proportionally.
However, by limiting analysis to only those individuals who are owner-occupiers, increases in
net illiquid assets are shown to be even more pronounced:
Much of these increases in illiquid wealth can be accounted for by increases in property prices. However, for younger age groups, it is likely to be a combination of both house-price inflation and the receipt of capital from parents or other family members to use as a deposit on property purchases. For example, among the declining proportion of those in the 20-29 age range that own property, those in this category in 2005 had on average around £50,000 of illiquid wealth. However, existing evidence that the median age of a first-time buyer in 2005 was 30 (Source: Council of Mortgage Lenders) suggests that illiquid wealth in this age group is not solely the result of asset price inflation, but may also result from parental gifts 12. It is likely that once individuals in this cohort join the property-ladder, parental help combined with rapidly increasing property prices in the period have ensured their net illiquid assets also jump rapidly in value.
12 Indeed recent evidence indicates that in London, an assisted young first-time buyer had an average deposit of £57,000 compared to £12,500 for unassisted young first-time buyers. See Council of Mortgage Lenders (2007).
Liquid and Illiquid Assets: The Net Position Adding together changes in liquid and illiquid assets, what has happened to asset accumulation across the life course in the UK?
Across all households and for all age-groups, total net household wealth has increased over the period 1995-2005. Again, although older cohorts have seen the biggest increases in their net household wealth, younger cohorts have seen the biggest increase as a ratio to their net household wealth in 1995.
Asset Accumulation across the Life Course: Further Findings In addition to the main analysis of changes to household liquid and illiquid wealth, the Asset Accumulation across the Life Course research contains further findings which merit review.
Income Among those of working-age, weekly household income typically increased. Everyone aged 60 and below in 2005 saw their weekly household income increase over the period 1995by around £200-£250.
In contrast, individuals aged over 60 in 2005 saw either no change or slight reductions in their weekly household income over the period. Nevertheless, each older cohort saw higher incomes than those preceding it experienced at a similar age.
Saving Changes to patterns of household saving are complex, and can be best understood by referral to the original research. For all households across the age range among all cohorts, the rate of monthly saving was between 4-8%.
Broadly speaking most cohorts aged 60 or below in 2005 marginally increased the proportion of their monthly income saved. Those aged 65 and above saved the same proportion of their monthly income or slightly less.
Private Pension Contributions Trends on rates of contribution to personal pensions were uniformly negative. All cohorts saw declining proportions of households contributing to a private pension over the period 1995Asset Accumulation across the Life Course and Public Policy This brief description summarises the principal findings of the Asset Accumulation across the Life Course research. However, other important findings have not been described here, and deserve review by the reader in the original research report.
Having outlined changes to patterns of asset accumulation, the remainder of this report situates these findings in contemporary UK policy debates, and formulates relevant recommendations for policymakers.
Living with Debt: Asset Accumulation and the Young The prevention of income poverty in retirement begins when individuals are in their 20s. The savings, debt and asset accumulation of individuals in this age-group are of significant interest to policymakers, the financial industry and older people’s charities.
What has happened to the asset accumulation of individuals at the start of their working-lives and what does it mean for public policy?
In order to ensure an adequate income in retirement, individuals must build up assets prior to retirement during their working-life. One mechanism to do this is a pension: individuals can accumulate wealth in a pension and then use it to buy an annuity at retirement. However, despite the attention given to UK pension reform in recent years, pensions are not the only form of asset accumulation available to fund retirement income. Property, savings and investments can also be used as vehicles to accumulate assets to provide a retirement income. This point has been absorbed into Government thinking on what constitutes ‘saving’ for retirement. In the 2004 Pre-Budget Report, the Government recognised that saving can take multiple forms, and commits itself to enabling individuals to choose from a range of
mechanisms to accumulate assets:
“The Government is committed to a policy framework that enables people to choose how and when to save across the full range of asset-building activities. Traditional measures of aggregate saving, such as the saving ratio, often fail both to reflect this variety and to highlight the positive impact asset growth has had on households’ balance sheets in recent years. Broader measures, for example including capital growth, indicate that saving behaviour has been more robust in recent years than is often appreciated.” (HM Treasury: 2004: 96) Clearly, ensuring that younger cohorts have sufficient assets to provide for an adequate retirement income involves recognising that saving for retirement can take many forms. It also requires an examination of what has happened to trends in non-pension household assets among younger cohorts in recent years, and how these trends will impact upon their retirement income.
Asset Accumulation across the Life Course
Trends in liquid asset accumulation among younger cohorts were virtually unchanged during 1995-2005. In contrast, trends in liquid debt show greater usage of debt products. For example, those in the 25-34 age range in 2005 had -£4500 of household liquid debt. The figure for this age range in 1995 was -£2400. This trend may result from relatively low interest rates during this period, the increasing volume of personal loans accumulated in higher education, as well as rising incomes simply making greater volumes of personal debt available to younger groups.
Among property-owners in the 25-34 age group the average value of property assets has increased over the period, as has the average value of mortgage debt. For example, although a property-owner in the 25-34 age range in 2005 had on average net household illiquid wealth of £73,000, they typically possessed £97,000 of household mortgage debt. A property-owner in this age group in 1995 typically had £15,000 of household net illiquid assets and £50,000 of household mortgage debt.
The number of individuals in the 20-29 age range who own a property is relatively low and appears to have declined over the period in question; nevertheless, a similar trend can be seen. In 1995, an individual owning a property in this age range had £46,000 of household mortgage debt, and £12,000 of net household illiquid wealth. In 2005, an individual in the 20age range who owned a property had £97,000 of household mortgage debt and £50,000 of net household illiquid wealth.
The value of net illiquid wealth among younger cohorts has increased more, proportionally, than the value of mortgages. However, the proportional increases in mortgage debt are higher than proportional increases in real income. As mentioned previously, the levels of net illiquid wealth among younger cohorts suggest the external financial investments in their illiquid wealth, i.e., parental help with deposits for property purchases.
On the one hand, younger cohorts have greater net illiquid wealth, resulting from brief exposure to rising asset prices, and parental contributions to their illiquid wealth. However, younger cohorts have less net liquid household assets and bigger mortgages, which means a greater proportion of their current and future income is being used to purchase property.
Younger cohorts have seen their weekly household income increase by around £200 over 1995-2005. However, the proportion of younger household contributing to a personal private pension has declined.
The Government’s challenge is to respond appropriately to the trends that exist in nonpension household asset accumulation to ensure that younger cohorts have sufficient retirement income, and more generally, to mediate the effects that these trends will have on their lives.
Younger cohorts have seen remarkable increases in wealth over the period 1995-2005. But this wealth is property-related and illiquid, and results in part from one-off cash transfers from family members. This growth in wealth has been coupled with much larger mortgages that have drawn increasing amounts of younger people’s current and future income and wealth into illiquid form. Larger mortgages also mean that during a period of higher interest rates, mortgage repayments for younger cohorts may consume such significant portions of their household income as to seriously reduce their scope to save through non-property accumulation vehicles, such as a personal pension. In fact, the proportions of younger households contributing to a personal pension have already declined. It may be more efficient, or individuals may be more concerned with, paying off debts, before undertaking retirement saving via a pension or other savings vehicle.
In addition, income used for interest payments on liquid and illiquid debt is at the expense of possible retirement saving, even though many erroneously view mortgage payments as ‘saving’; in the early stages of a mortgage, the bulk of repayments go toward meeting the cost of the loan, not reducing the debt. For younger cohorts, the total costs during their life course of interest repayments will exceed that experienced by older generations.
This creates questions, and potential challenges, about how different forms of asset accumulation will impact upon each other over the life course of younger cohorts.