Are renters heading for a pension crisis?
Recently there's been a heated debate on our sister website Interactive Investor as to whether the UK housing market is in recovery or not.
While the unpredictable nature of the housing market means homeowners are never sure what lies ahead, they are still much better off than anyone renting, as long as they can keep up their repayments or haven't got an urgent need to move.
Because not only have rents gone through the roof lately, but recent research from Barclays also shows that owning your home rather than renting one will save you nearly £200,000 over 50 years.
The bank estimates the total cost of mortgage repayments, maintenance and other costs associated with owning the average home would come to £429,000 over 50 years, whereas renting the average home for the same period would cost £623,000.
Of course, the savings vary around the country depending on rent and house prices but owning always comes out on top.
But while owning your home will save you a rather hefty sum, the real benefit of homeownership is not apparent until our later years. The problem for those who choose to rent is that the cost of renting is constant.
This means they will have to continue to pay money to their landlords even once they have retired. While the money they paid in rent might have been a manageable proportion of their salary, once they start drawing a pension this payment could quickly become unaffordable.
Meanwhile, pensioners who own their own home are likely to be mortgage-free by that stage, which means they will enjoy minimal housing costs.
With volatile stockmarkets, high inflation and low annuity rates (which means you get less income from your pension pot), pensioners are already bearing the brunt of the recession - and there are reports out daily warning that we're heading towards a pension crisis.
For example, new figures from the Pension Policy Institute show that nearly half (45%) of workers between 50 and the state pension age will have to work until they are at least 76 if they want to maintain a reasonable standard of living.
This is coupled with another report from Scottish Widows, which shows that UK pension savings have hit an all-time low with only 46% of people saving enough for their retirement. Worryingly, the report reveals, one in five have put nothing aside for later life.
The only saving grace for many existing and soon-to-be pensioners is that while they might be cash poor, most of them own their own home. And, as mentioned above, most of these homes are now mortgage-free, meaning many pensioners don't have to pay a huge amount each month for their accommodation.
It also means that they could downsize to a smaller or less expensive property or even consider equity release should they find themselves in need of some cash.
Fast-forward to 2050, this might not be the case for retirees. They are the ones who are currently struggling to get onto the property ladder – some will have to wait until they're older before they get a mortgage and so will have to pay it off until later in life, while others might not even be able to ever get a foot on the first rung.
Whichever camp they may end up in, they will have to face higher living costs than the current generation of pensioners. Experts talk about a pension crisis now. But what is the generation who can't afford to buy their own home going to do once they retire and haven't got any property to 'unlock value' from?
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.