House prices grow nearly twice as fast as UK retirees’ income since 1997

Contributing towards long term care costs would take 11+ years of saving

Falling investment returns puts extra strain on pensions for income in retirement

17 April 2013: Rising house prices over the last fifteen years mean that many retirees are living in an increasingly valuable asset that has grown almost twice as fast as the average pensioner income, the Equity Release Council has found.

Analysis of the latest data from the Land Registry and Office for National Statistics (ONS) shows that house prices have grown by 91% or £109,399 in real terms since 1997, from £120,211 to £229,610.* In contrast, the average retirees’ income has risen by just 46%, equivalent to an extra £6,343 in their annual budgets.  This has taken their average gross income from £13,786 to £20,129**.

With the government capping individual contributions towards the cost of long-term care at £72,000, it would take 11.4 years of putting this extra income to one side before reaching the amount retirees need to spend before they can access state support.

Table 1: How house prices increases have outweighed pensioners’ income gains

  House price growth Pensioner income growth

Fifteen year growth

+91% (+£109,399) +46% (+£6,343)

Ten year growth

+21% (+40,422) +22% (+£3,687)

Five year growth

-8% (-£19,017) +4% (+£809)

Financial crisis has helped pensioner incomes play catch-up:

The instability of the property market in recent times has at least allowed retirees’ incomes to regain some ground on house prices in terms of their rate of increase. Property values have fallen by 8% in real terms over the last five years, compared with a 4% growth in retirees’ income.

However this has not been enough to rival the overall growth rate of property values over the last fifteen years.  Before the financial crisis of 2007/8, the contrast was even greater: typical house prices rose by 31% in the previous five years (vs. 18% – pensioner income) and by 107% in the previous ten years (vs. 40% – pensioner income).

Retirement income increasingly reliant on pensions as investment returns drop:

Falling income from investments has meant that pensions have become increasingly important as a source of income for UK retirees.  While investment returns typically made up 16% of their income 15 years ago, this has fallen away to just 6% in 2012.

At the same time, retirees have been more reliant on private pensions and annuities, which now account for 40% of their income, compared with 37% five years ago and just 32% fifteen years ago. Since the financial crisis, state pensions have also grown in importance and now make up 38% of retirees’ income (compared to 36% five years ago) – see table 2.

Table 2: Pensions have gradually replaced investments as a source of income

  Now 5 years ago 10 years ago 15 years ago

Typical annual income

£20,129 £19,320 £16,442 £13,786

Private pensions and annuities

£8,134 (40%) £7,188 (37%) £6,075 (37%) £4,389 (32%)

Investment income

£1,207 (6%) £1,768 (9%) £2,145 (13%) £2,154 (16%)

Income from other non-government sources, including employment

£811 (4%) £790 (4%) £451 (3%) £387 (3%)

State pension

£7,697 (38%) £6,960 (36%) £5,855 (36%) £5,029 (36%)

Cash benefits other than the state pension

£2,280 (11%) £2,614 (14%) £1,916 (12%) £1,827 (13%)

Nigel Waterson, Chairman of The Equity Release Council, comments:

“What we are seeing is a new reality emerging in terms of retirement income as people increasingly look to pensions and annuities, rather than investments, to finance their later years. However, the uncertainty surrounding many funds means that people’s property is very often their biggest and most secure financial asset, with a far greater return on their original investment.

“Particularly if they bought their homes some time ago, many will have a large amount of equity tied up in their property that can relieve the pressure on their retirement income and help with additional expenses.  In many cases, equity release can offer retirees an alternative to selling their property – one that preserves their domestic comfort as well as their attachment to the place they call home.

“Whether choosing a lump sum or regular monthly payments, equity release customers can enjoy the relief of an extra source of retirement income, safe in the knowledge they are free to remain in their homes for the rest of their lives, if they choose to, and will never owe more than the property is worth.”

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