This figure is also more than double today’s average annual retirement income of £17,212 and that leaves a potential shortfall of £17,984 a year.

The report by the Equity Release Council and Key – The pension / property paradox: moving beyond tunnel vision in retirement planning – shows that pension pressures are set to rise. Many people access their savings early and generous final salary pensions are expected to be extinct for most people by 2050, the Department for Work and Pensions has predicted.

Challenges for older people include rising living costs (30%), prioritising mortgage repayments over pension savings (24%) supporting financial dependents (22%) and earning less money so unable to afford to save more (24%) are all cited as reasons why homeowners over-55are unable to increase their pensions savings.

These factors are also prompting the early erosion of savings pots, as one in six (16%) homeowners aged 55+ who are yet to retire have, or plan to, dip into their pension savings early.

Table one:  Most common reasons over-55 homeowners – who have maintained or decreased the amount they save into their pension and are not yet retired – are unable to increase pension savings before they retire

Source: Equity Release Council, 2020

Yorkshire and the Humber is home to the greatest reality gap, with older homeowners in this region likely to see a shortfall of £27,723 between what they anticipate needing and the retirement income they’re likely to achieve. Followed by London (£19,856) and the South West (£19,531).

Table two: reality versus expectation in retirement income across the UK

Source: DWP Pensioner Income Series, August 2019 and the Equity Release Council, 2020. Income older homeowners expect to need per year calculated using midpoints and based on respondent’s estimates of spend each month.  

Mortgages and pensions compete to be top priority

Valued at a combined £11.21 trillion, private pensions and property account for more than three quarters (77%) of household wealth. They are the two biggest sources of wealth in the UK, the fastest growing and consistently ranked top in public perceptions as the safest ways to save for retirement.

The report shows paying off a mortgage often competes with retirement savings to be older homeowners’ biggest financial priority – stifling pension contributions and increasing the likelihood of people being “asset-rich, cash-poor” in later life.

Just over one in three (31%) homeowners who have increased their pension savings in the last year have been able to do so as they’re no longer paying off their mortgage. Among those who still have a mortgage, almost half (44%) report that paying off their mortgage has, or is likely to, limit their pension savings potential.

Property wealth holds significant untapped potential to help close the retirement income gap. The average homeowner in England and Wales could access £88,290 from their property via a typical equity release plan – equivalent to over a decade of state pension payments.

Comments

David Burrowes, chairman of the Equity Release Council, commented: “With the UK’s population ageing rapidly, the scale of this issue is only set to become greater. An increasing number of consumers must make their pensions savings last over longer retirements with property wealth fast emerging as a viable solution to help meet this funding challenge.

“Our report emphasises the pension pressures faced by many across the UK and calls for property wealth to be better considered and integrated into the advice process. A single-product solution to retirement planning is no longer fit for purpose. We must break down the silos that create tunnel vision when it comes to later life financial planning.”

Will Hale, chief executive officer of Key, said: “Today’s report shines an interesting spotlight on an issue that the vast majority of us will face at some point in our lives.

“How do we juggle our financial responsibilities as we age in such a way that allows us to increase our pension contributions and achieve goals such as paying off our mortgages?  Sadly, there is no simple answer to this particular question – especially with the slow death of final salary schemes but an increase in longevity.

“However, to me this report suggests that we should be asking an entirely different question – how can we use all our assets to help us achieve our wants and needs in later life?

“While even the boost provided by using residential property, investment and savings as well as pensions might not help everyone achieve a retirement income of over £35,000 – which is higher than the average UK salary – it will certainly help.

“Indeed, taking a holistic approach to retirement planning and ensuring access to good specialist advice will mean that more people are able to enjoy a comfortable retirement.”

Claire Singleton, chief executive at Legal & General Home Finance, commented: “Every retirement is different, and many people will need to use a variety of retirement income solutions to meet their personal goals – for the current generation of people in or nearing retirement, property has been a vital asset in this regard.

“This is partly due to defined benefit pensions becoming less common but also because of the significant house price increases many baby boomers will have seen over the last 20 years (a 185% increase from December 1999). This is why home finance options such as equity release have become such a pivotal element of the contemporary at-retirement sector.”

Jonathan Barrett, partnerships director at digital retirement solutions fintech Abaka, said: “These figures from the Equity Release Council only serve to highlight that the average consumer today is sleepwalking into a later-life financial crisis.

“Consumers are not saving enough now to ensure they can live comfortably post-retirement, and the industry faces a huge challenge in engaging customers with their pensions and financial planning for the future.

The report has put forward suggestions as to what can be done to improve the situation.