«September 2007 International Longevity Centre - UK The International Longevity Centre - UK (ILCUK) is an independent, non-partisan ...»
• Put ‘Decumulation Policy’ centre-stage: start the debate The last five years have been dominated by debate among policymakers and the wider public about ‘accumulation policy’. The result has been an increase in ‘financial education’ within schools, growing awareness of the need to save for retirement and a comprehensive suite of reforms to the UK pension system. However, the time is now right for all stakeholders to focus attention on ‘decumulation policy’. This means that related NGOs, charities, the financial industry, as well as political parties, must all address decumulation policy, formulate positions and enter the debate.
This point is particularly important because of the growing role property has in household
asset portfolios. Indeed, young and middle-aged cohorts have in recent years confronted:
an inflating property market that encourages them to see property as an investment; a Government that recognises saving can take different forms, including property; and a tax regime for primary homes that makes property an efficient investment.
However, despite the range of factors encouraging younger cohorts to accumulate assets in the form of property, and the rising property wealth of older cohorts, policy discussion to encourage and enable effective decumulation of property wealth remains removed from the mainstream political and policy agenda.
• Twin-track decumulation: equity release and downsizing As described above, decumulation of housing wealth can occur via both downsizing and the use of equity release products. However, one form of decumulation does not preclude the other, even though this fact is often overlooked in policy debates relating to equity release or downsizing. Both of these forms of decumulation should be promoted and enabled by Government policy.
• Decumulation via the housing market: providing incentives As outlined, many older people will continue to occupy family accommodation long into retirement. Older people must not be penalised for continuing to occupy their homes.
However, the Government can go further in incentivising down-sizing among older people; for example, by waiving stamp-duty for those in retirement moving to smaller accommodation 36. The full range of policy options available must be explored and tested.
• Decumulation via the housing market: achieving the right housing stock A lack of suitable accommodation is a major barrier to downsizing among older people, and making improvements to housing supply is an important step in encouraging downsizing. However, it must be recognised that this remains an immense challenge, quite besides the usual difficulties associated with new house-building and planning restrictions.
This is because changing the housing supply to incentivize downsizing means developing properties which are cheaper, smaller yet more desirable than the larger and more expensive properties which many older people occupy as they enter retirement. Size and quality of accommodation are determinants of price in the housing market, but downsizing implies individuals making compromises in these dimensions in order to release capital.
However, the preference of many older people is precisely to use the capital they have to live in the home of their choice, and this may therefore inhibit downsizing. This is particularly the case when declining mobility associated with ageing makes size and type of accommodation an even more important factor in quality of life. The importance of achieving the right housing stock to enable decumulation is therefore matched only by the challenge in doing so.
Achieving the right housing stock in this context also means properties suitable to the potential future requirements that older people might have in terms of mobility and access. This means, for example, taking account of initiatives such as the ‘Lifetime Homes’ agenda 37.
The Government must therefore ensure that its plans to increase new house-building is not just targeted at first-time buyers; it must oversee the development of properties aimed specifically at older people. This will help to prevent the problem that may result if more downsizing by older people is achieved: older cohorts competing with young or first-time buyers for smaller properties.
• Decumulation through equity release: getting it right The usage of equity release products in the UK - although high by international standards
- remains significantly below its potential. The various reasons for this have been extensively explored elsewhere 38, but include: insufficient financial advice; low product awareness; the legacy from previous product mis-selling; and potential loss of benefit income to those on the cusp of welfare entitlements.
Much has already been written about the potential of the equity release market in the UK 39, the value of equity release products 40 and obstacles to equity release 41. There is not space here to make detailed recommendations for the development of this market.
Nevertheless, it important for the Government to now dedicate significant time and See Harding E (2007).
The design and promotion of so-called ‘Lifetime Homes’ has been spearheaded by organisations such as the Joseph Rowntree Foundation; see: http://www.jrf.org.uk/housingandcare/lifetimehomes For example, see Terry R and Gibson R (2006); or Equity Release Working Party, Actuarial Profession (2005).
See Bramley G (2004).
See WhichOnline (2006).
See Terry and Gibson (2006).
resources to exploring how this market can be developed, for example, through addressing disincentives in the welfare system to undertake equity release. In particular, the Government should not rule out taking radical steps to support the market, for example, by underwriting segments of the market.
• Promote financial advice Decumulating assets, and doing so effectively, is difficult if older people do not have the financial skills required. Crucial research in recent years has shown the extent to which the ageing process is associated for many older people with declining numerical capability which inevitably impacts upon financial capability 42. In fact, in addition to changing cognitive capacity, academic research suggests that ageing is associated with changes to the way in which individuals make decisions 43. This underlines the importance of the current financial advice agenda and the Thoresen Review of Generic Financial Advice. The Government must ensure that sufficient and appropriately designed financial advice is available for older people to enable decumulation. Alongside changes to the equity release and housing markets, financial advice is the third-plank of an improved decumulation policy.
For example, see Banks J and Oldfield Z (2007); Finucane M et al. (2002).
See Lockenhoff C and Carstensen L (2004).
Conclusion Patterns of asset accumulation across the life course have changed. Like most significant societal changes, policymakers and other key stakeholders need to respond. This report has sought to provoke discussion, and make some initial tentative recommendations across a range of relevant policy domains.
The approach deployed in this paper has deliberately considered real wealth transfers in the housing market alongside other kinds of wealth transfer around society, principally via the state. This approach is unusual, and some will find its implications uncomfortable. However, simply ignoring changing patterns of asset accumulation and wealth transfer is neither tenable nor legitimate.
The real story behind Asset Accumulation across the Life Course is the spectacular growth in UK house prices during the period in question. There is growing awareness that the functioning of the housing market has lead to a transfer of wealth around society, which some have characterised as a transfer from ‘young to old’.
In truth, the notion that rising house-prices have caused a wealth transfer from young to old is overly simplistic. The process of wealth transferral via the property market is complex, involves transfers of wealth upwards to cohorts who would not qualify as ‘old’ and is determined, in addition, by socio-economic factors: possession of significant property wealth is a function of income and existing wealth, not just age. It is clearly wrong to assume that all those in retirement live in highly valuable properties and, in fact, rates of property ownership decline among older cohorts. Nevertheless, it can be seen that by volume, older cohorts pre and post-state pension age have on average benefited significantly from inflation in the value of their property assets, and this has been matched by growth in the value of mortgage debt held by younger cohorts.
Younger cohorts have been the beneficiary of real increases in incomes that have not been matched among older cohorts. However, where these increasing incomes are used to obtain, and pay off, increasingly large mortgages, it is debatable as to who is actually receiving the benefit of the increasing incomes of young cohorts. House prices rise, in part, as a reflection of rising real incomes, but it is not necessarily those actually earning rising incomes that enjoy the gain from these rises; the housing market enables others to capture the benefit.
Conversely, when wealth is tied up in illiquid property, is not even clear that those enjoying inflation in the value of their property assets are truly profiting 44.
Who Really Benefits?
The Government therefore confronts a curious situation. On the one hand, younger cohorts have seen increasing real incomes but, with rising real and expected mortgage debt, many young people do not feel better-off; they are forced to pay more to live in the same houses as previous cohorts. These rising incomes contrast with the static real incomes of older cohorts who have watched in amazement as their homes have ballooned in value, but have mostly been unable to meaningfully access this wealth without making other unpalatable compromises in their choice of accommodation. In the context of income and wealth, such is the conundrum posed by rising UK property prices: who really benefits?
The answer is, perhaps, the middle. Those property owners aged around 50-55 in 2005 have seen little or no increases in mortgage debt, hefty increases in their illiquid household wealth, while continuing to enjoy rising real incomes.
Clearly such an argument may not apply to those owning two or more properties. However, as Asset Accumulation across the Life Course showed, the numbers of second home owners are not necessarily as high as some would expect.
For other cohorts, despite the ‘feel-good’ factor associated with rising house prices, such price inflation has arguably done little for the retirement income of neither the young nor the old. Just as today’s older cohorts find themselves possessing valuable property assets but are unable or unwilling to significantly access this wealth, today’s younger cohorts, forced to skew their retirement saving through the ‘vehicle’ of property, may find themselves in exactly the same predicament when they reach old-age, or worse. Despite the common belief that property is a good investment for old-age, even during a period of rising house prices, it is difficult not to conclude that high house-price inflation does in fact undermine retirement income. This is one of the key conclusions to be drawn from the Asset Accumulation across the Life Course research.
Public Policy across the Generations
The Government’s key dilemma is how to balance the interests of young and older cohorts in light of wealth transfers that have taken place. Having seen such dramatic asset accumulation, can older cohorts expect to rely on the young to pay for them in retirement, and more generally, the costs of the UK’s ageing population? If not, how can the Government create greater awareness that older cohorts will have to use their housing wealth to fund retirement? How can the Government go about changing attitudes which are often entrenched against such an idea?
Perhaps the most effective mechanism for encouraging older people to use their housing wealth to generate a retirement income will be for the Government to let the incomes of older people be squeezed. Yet such a strategy seems morally unacceptable to deploy in relation to those in the latter years of their life, unable to participate in the labour market, and experiencing the various aspects of physical decline associated with the ageing process.