Housing-Rich, Income-Poor

Transcription

1 Housing-Rich, Income-Poor The potential of housing wealth in old age A paper for Housing Across the Lifecycle Sonia Sodha Institute for Public Policy Research October 2005

2 Institute for Public Policy Research Southampton Street London WC2E 7RA Tel: Fax: Registered Charity No The Institute for Public Policy Research (ippr) is the UK s leading progressive think tank and was established in Its role is to bridge the political divide between the social democratic and liberal traditions, the intellectual divide between academia and the policy making establishment and the cultural divide between government and civil society. It is first and foremost a research institute, aiming to provide innovative and credible policy solutions. Its work, the questions its research poses, and the methods it uses are driven by the belief that the journey to a good society is one that places social justice, democratic participation, economic and environmental sustainability at its core. This paper was first published in October ippr 2005 Housing-Rich, Income-Poor 2

3 Contents Acknowledgments 4 About the author 4 About the project 4 Summary 5 Introduction 6 Current and historic levels of equity withdrawal 6 Existing studies of the housing-rich, income-poor 7 Methodology 10 Results 14 Interaction of released housing wealth with the benefits system 18 Conclusions 21 References 23 Housing-Rich, Income-Poor 3

4 Acknowledgements This paper has benefited from useful comments from Jim Bennett, Dominic Maxwell, Howard Reed, Peter Robinson and Kate Stanley. This project is generously supported by The Places for People Group, Prudential, Standard Life Bank, and Yorkshire Building Society. Many thanks. ippr s work on assets would not be possible without support from The Children s Mutual. About the author Sonia Sodha is a Research Assistant, in the social policy team of ippr. About the project This paper is part of a larger project, Housing Across the Lifecycle. This project is looking at access to housing wealth in early adulthood, and how housing wealth is used later in life. For further information, please visit or contact: Sonia Sodha ippr Southampton Street London WC2E 7RA t: e:s.sodha@ippr.org NOTE After the publication of the first version of Housing-Rich, Income-Poor: The potential of housing wealth in older age, it came to our attention that there were mistakes in the English Longitudinal Study of Ageing dataset held by UK Data Archive. One of their key variables that we used in our analysis had been derived incorrectly. We have now re-run our analysis using the new dataset just published by the Economic and Social Data Service. The figures presented in this paper are, as a result, more accurate, but key findings are unaffected. Housing-Rich, Income-Poor 4

5 Housing-Rich, Income-Poor The potential of housing wealth in old age Summary What is the potential of housing wealth to combat low income in retirement? This paper analyses data from the English Longitudinal Study of Ageing to determine how many of those who were retired, and how many of those who were approaching retirement, were relatively housing-rich, but income-poor. Our findings: 1. A small but significant minority of those who were retired had access to fairly substantial amounts of housing wealth but had low incomes in 2002/03. Of those who were retired, 4.2 per cent had an income below 60 per cent of the national income distribution before housing costs median and owned equivalised housing equity of over 100,000. Of those who were retired, 10.2 per cent had an income below Age Concern s Modest but Adequate standard ( 157 per week before housing costs) and owned equivalised housing equity of over 100, Around 9 per cent of retired individuals potentially in a position to release housing wealth faced disincentives to do so from the benefits system. Of those who were retired, approximately 9 per cent owned equivalised housing equity worth over 100,00 but would have faced a reduction in their benefit levels should they choose to release housing wealth. 3. The evidence in the report suggests that the number of pensioners who will be income-poor but relatively housing-rich is set to grow over the next years. Of those aged 50 or over, who were yet to retire, 15.6 per cent were projected to have an accumulated state and private pension wealth of less than 160,000 on retirement, and owned equivalised gross housing equity worth 100,000. This is the amount required to secure the Modest but Adequate retirement income, given certain assumptions. This means that a small, but significant, minority of those who were retired in 2002/03 had some housing wealth but had low incomes. There are two implications of our findings: Note 1. At the macro level, housing wealth has only a limited role to play in filling the pensions gap and we should be cautious about any solution to the inadequacy of pensions savings that relies solely on housing wealth. 2. At the individual level, making the release of housing wealth easier has the potential to greatly increase the living standards of low-income pensioners who own homes of fairly substantial value. This potential is set to grow in the near future. We analyse data at the benefit unit level: we assume that both members of a couple have joint access to their combined income, housing wealth and pension wealth. Our analysis equivalises each couple s combined income, housing wealth and pension wealth to the single person benchmark in the OECD equivalence scale, used throughout the ELSA dataset. Housing-Rich, Income-Poor 5

6 Introduction What is the potential of housing wealth? Can it fill a gap left by the declining adequacy of pension wealth? The answers to these questions are crucial in deciding what role government should take, if any, in helping people to release equity from their home. Many have been sceptical about the potential of housing wealth in this context (see for example Curry 2004; Pensions Commission 2004; Banks, Emmerson and Oldfield 2005); others have been less so (Actuarial Profession 2005). But there has been no recent analysis of disaggregated data on housing wealth by income for those who are retired, and pension wealth for those who are yet to retire. Whilst it is broadly right to conclude that housing wealth cannot be a complete solution to the pensions crisis, three inter-linked questions still remain: 1. How many pensioners are relatively housing-rich, but income-poor, and could therefore increase their income to an acceptable level by releasing housing wealth? 2. To what extent does the benefits system act as a disincentive to using housing wealth to boost income for low-income pensioners? 3. Should releasing housing wealth, and its interaction with the benefits system, be a focus of government policy? By addressing the first two questions above, this paper seeks to establish an evidence base from which the third question can be answered. Below we summarize current views in the literature on the potential of housing wealth to improve pensioner poverty. We then go on to analyse data from the English Longitudinal Study of Ageing on housing wealth, by income for those who were already retired, and by estimated pension wealth for those who were yet to retire, allowing us to draw conclusions about how many of today s pensioners are housing-rich, income-poor, and how these numbers are likely to change over the next years. We also consider the benefits system and the ways in which it might interact with equity release mechanisms. This study forms part of an ongoing ippr project on the accumulation and decumulation of housing wealth across the lifecycle. This project examines how housing wealth is accumulated at earlier stages in the lifecycle, and the extent to which this is dependent on parental wealth and location. At the other end of the cycle, it looks at whether there is untapped housing wealth that pensioners might be able to use to boost their income. What role, if any, should government play in the accumulation and decumulation of housing wealth? 1. Current and historic levels of equity withdrawal Benito and Power (2004) summarize data from the 2002/03 Survey of English Housing (SEH) on housing equity withdrawal. SEH categorises equity withdrawal into five different methods: 1. Last-time sales: A seller does not buy a new property and proceeds of the sales are released from the housing market. 2. Trading down: A seller moves to a cheaper property but reduces the mortgage by less, to leave a cash sum. 3. Overmortgaging: A moving owner-occupier increases their mortgage by more than the difference between the old and new house prices. 4. Remortgaging: A borrower takes out a new mortgage and increases their debt without moving properties or improving the property to the same extent. 5. Further advances or second mortgages: A borrower raises a further advance on an existing mortgage or takes a second mortgage without moving properties or improving the property to the same extent. (From Benito and Power 2004, 303) Housing-Rich, Income-Poor 6

7 Benito and Power show that 4.1 per cent of households (5.8 per cent of owner-occupiers) withdrew equity in Remortgaging/taking out a further advance was the most common method (around 2.8 per cent of owner occupiers). Trading down was undertaken by 0.8 per cent of owner occupiers. The median amount of equity released by last-time sales was 60,000; by trading down, 55,000; by overmortgaging, 16,000; and by remortgaging or taking out a further advance, 13,800. Withdrawal of housing equity over the five years previous to 2003 is also presented broken down by income category, although due to the small number of observations (346), caution should be exercised before drawing too many conclusions from these figures. However, they suggest that releasing housing equity through borrowing is concentrated amongst high income households, whereas releasing housing equity through other methods, such as trading down and last-time sales, are evenly distributed across income groups. Unfortunately these data are not broken down by age, so we do not know how much of this current equity withdrawal is being used by pensioners to supplement retirement income. Industry data on loan products marketed at older people are available, however. There are two products specifically marketed at older people: lifetime mortgages and home reversion plans. Lifetime mortgages provide a loan against the value of a home that is repaid from the estate when the house is sold. Interest is either paid monthly, or rolled up and repaid at the end of the loan period. In a home reversion plan, part of the home is sold to a company below market value, and the occupier continues to live in the home rent-free. The proportion of the home that is sold to the company is transferred on death. The Council of Mortgage Lenders has compiled data on lifetime mortgages, which provide only a partial picture of housing equity release by older people, as they do not include data on home reversion plans and other methods of releasing housing wealth, such as trading down 1. These figures show that in 2004, 26,270 new equity release plans were taken out (in 2003, this figure was 25,114; and in 2002, 16,302). In 2004, there were 83,728 current equity release plans with balances outstanding, totalling 3,998 million. 2. Existing studies of the housing rich, income poor Data sources Existing studies of the housing rich, income poor draw on a number of data sources: the English Longitudinal Study of Ageing, the Family Resources Survey and the Survey of English Housing. The English Longitudinal Study of Ageing (ELSA) is a new longitudinal study of 12,000 individuals aged 50 and over, focussing on the economic, social, psychological and health elements of the ageing process. Data are collected every two years: to date, there is one wave of data ( ) available. The survey was specifically designed to generate information that could be used to estimate total pension wealth on retiring, making it unique in the UK. The Family Resources Survey (FRS) is carried out for the Department of Work and Pensions on an annual basis. Approximately 29,000 households are interviewed. The Survey of English Housing (SEH) is a survey of 20,000 households conducted annually by the Office of the Deputy Prime Minister. It collects information on households, their housing, and attitudes to housing. 1 Council of Mortgage Lenders figures available online at Housing-Rich, Income-Poor 7

8 Recent trends Some recent studies look at the aggregate amount of housing wealth owned by the pensioner population in total compared to total pension wealth (Pensions Commission 2004) or other more liquid forms of wealth (International Longevity Centre 2003). Banks, Emmerson and Oldfield (2005) use data from ELSA to consider the composition of nonpension wealth holdings for those aged by whether people have a private pension. They find that the mean amount of housing wealth is lower for those who have never had a private pension than for those who have. In contrast, the Actuarial Profession argues that housing wealth does have a potential to fill the pensions gap. It cites the fact that 75 per cent of the retired population have inadequate income (Deloitte 2002) and 70 per cent of the retired population are homeowners (ONS 2002), and concludes that there must be an overlap of at least 45 per cent of the pensioner population (4.3m) (Actuarial Profession 2005). It should be noted however that not all pensioners in the 45 per cent overlap necessarily have adequate amounts of housing equity in order to release wealth. However, none of these reports looks at disaggregated data for housing wealth by income. As a result, we do not know how many pensioners are relatively housing-rich, but income-poor. We know that half of those who live in poverty are homeowners (Burrows and Wilcox 2000), and that 60 per cent of poor homeowners are over 60 (Meadows and Rogger 2005). Whilst Curry (2004) and Pension Commission (2004) are right in their conclusions that housing wealth cannot be a solution to the pensions crisis on a large scale, questions still remain: how large is the class of housing-rich, income-poor pensioners to whom it is very common for both practitioners and commentators to refer? The most comprehensive information about housing wealth by income level is in Hancock (1998). This study pooled data for the and Family Resources Survey to give a sample of 5,000 people aged over 65. Table 1, overleaf, shows us the income and housing wealth distribution for pensioners in the dataset. If we define being housing-rich and income-poor as being in the bottom two income quintiles, and the top two property value quintiles, 9.2 per cent of pensioners aged 65-74, and 13.2 per cent of pensioners aged 75, were housing-rich, income-poor 2. But we lack information on which values the income and property value quintile bands take, so this definition lacks meaning, and it is difficult to draw conclusions about housing-rich, income-poor pensioners from this data. It could be that property value is unevenly distributed across the quintiles so that even in the fourth quintile of property value, properties may not be worth considerably more than the median. 2 Twenty four per cent of the 1,166 aged in the second income quintile were in the top two property value quintiles, so 280 out of 3,044, which is 9.2 per cent. Twenty nine per cent of the 858 aged 75+ in the second income quintile were in the top two property value quintiles, so 249 out of 1,889, which is 13.2 per cent. Housing-Rich, Income-Poor 8

9 Table 1: Housing wealth quintile by income quintile for those aged 65 or over in the and Family Resources Surveys, reproduced from Hancock (1998) Copyright Institute for Fiscal Studies In addition, this information is very out of date and is unlikely to give us a good idea of how many pensioners are housing-rich, income-poor today. The study uses FRS data from the mid-1990s, before the subsequent property boom, so the current picture could be expected to be very different. Meadows and Rogger (2005) provide more up-to-date information on all low-income homeowners (not just pensioners). They define low income as having equivalised household income before housing costs of below 60 per cent of the median, 228 for FRS and 216 for SEH Twelve per cent of low income households lived in properties in Council Tax Band E or above, worth over 88,000 in 1991, and half of these were aged over 65 (SEH 2002/03). So 5.5 per cent of all low-income households were aged over 65 and live in properties in Council Tax Band E or above. In 2002/03, there were 12.4 million people living in low-income households (Palmer, Carr and Kenway 2004). This implies that in 2003, there were 620,000 low-income homeowners aged over 65 whose homes were in Council Tax Band E or above. There are 10.7 million pensioners living in the UK (DWP 2004c), so this figure represents 5.8 per cent of all pensioners. Housing-Rich, Income-Poor 9

10 This is a good starting place for a recent (but rough) measure of how many pensioners are on low incomes but have some housing wealth. But council tax banding is an inaccurate way of measuring housing wealth, given that property prices have increased by different amounts in different regions of the UK since We should also be wary about small sample sizes given that this rough figure is produced from only one year of FRS/SEH data; Hancock (1998) pooled two years of FRS data in order to produce a sample size from which estimations about the population as a whole could be made. Future trends The homeownership rate amongst pensioners is predicted to increase: current rates of homeownership are highest amongst those aged 45-59, who are approaching retirement (Pensions Commission 2004). But home ownership is now falling amongst the next generation, people below the age of 45 (Pensions Commission 2005). Unpublished Prudential market research suggests that as many as one in four households might still be paying a mortgage in retirement in the future 3, a concern shared by the Pensions Commission. If so, equity release might not be a viable option for all of these homeowners. Summary Table 2 below summarises what the current literature tells us about the number of housing-rich, income-poor pensioners. Table 2: Current studies and information on the housing-rich, income-poor Study Data source Information supplied Drawbacks Hancock FRS (1998) (pensioners only) Banks, Emmerson and Oldfield (2005) Marmot et al (2004) Meadows and Rogger (2004) ELSA ELSA SEH Housing wealth quintile by income quintile for pensioners; median housing wealth by income quintile. Mean net housing wealth by pension status (whether respondents hold a current pension) for those aged 50 to the State Pension Age (SPA). Correlate holding a private pension and homeownership with financial wealth holdings. 11 per cent of low income homeowners live in properties in Council Tax Band E or above, 5.5 per cent of these are over 65. Out of date No quintile band values No breakdown of housing wealth by retirement income/estimated pension wealth No breakdown of housing wealth by retirement income/estimated pension wealth Council tax band not a good measure of housing wealth. There is clearly the need for more detailed data analysis of the number of low-income pensioners who own homes that could potentially be used to boost their income. 3. Methodology Data sources In analysing the data on housing wealth by retirement income/pension wealth there are a number of potential data sources we could use that have already been drawn on by previous studies: the English Longitudinal Study of Ageing (ELSA), the Family Resources Survey (FRS) and the Survey of English Housing (SEH). 3 Prudential press release 22 April 2004, cited in Curry (2004). Housing-Rich, Income-Poor 10

11 Table 3: Potential data sources Data Source Measure of housing wealth? Measure of house size by number of rooms? Measure of income? Can we break down numbers of housing-rich, income-poor on a regional basis? ELSA Yes Yes Yes No, and coverage is limited to England. FRS Yes Yes Yes Sample size too small. SEH Only by council Yes Yes Sample size tax band too small. Can we make predictio ns for next 5-10 years? Yes No No Can we control for financial wealth? Yes Yes No For the purpose of examining the numbers of housing-rich, income-poor pensioners, it is clear that SEH is inferior to the other two surveys as it allows housing wealth to be categorized only by council tax band. This would be a far-from-perfect measure of housing wealth, firstly because the bands are quite large, and more importantly, because property prices have changed differently across different regions and properties since ELSA and FRS both have relative advantages and disadvantages. The main advantage of FRS over ELSA is that it covers the whole of the UK. It would also allow a regional breakdown in theory, although its pensioner sample size would almost certainly be too small to draw any reliable conclusions about how the population of housing-rich, incomepoor pensioners varies regionally. Although ELSA only covers England, its advantages are that it has a larger sample of older people as it is specifically a survey of ageing, and it contains data about pension wealth for those aged over 50 who have not yet retired, so would allow predictions about the number of housing-rich, income-poor pensioners in the near future. For these reasons, we have decided to conduct our analysis using ELSA rather than FRS data. Definition of income poverty For the purposes of our analysis, we need to define what it means to be income-poor and housing-rich. There are a number of different ways of measuring pensioner poverty (Goodman, Myck and Shephard 2003): 1. The number of people living below a given income line in relation to the overall income distribution. This is the type of indicator used by the government in measuring pensioner poverty (DWP 2004a). The most common headcount threshold used is 60 per cent of median household income. In order to measure poverty over time, relative thresholds will use a measure from the income distribution of the year in question; absolute thresholds use a measure from the income distribution in a baseline year. 2. The number of people living below a given budget standard. The level of income required to reach a low-cost but acceptable minimum standard of living is determined by calculating the costs of a certain basket of goods, including food, housing and other necessities. People falling below this income level are defined as poor. Housing-Rich, Income-Poor 11

12 3. Deprivation indices. Poverty is defined as lacking a critical number of sociallyperceived necessities (usually two or three) identified by large-scale surveys of the public, for example a damp-free home, a warm waterproof coat and two meals a day. In order to determine which pensioners are income-poor, the income and budget approaches above are more relevant than deprivation indices. The measure of income used in the income level approach can either be before housing costs (BHC) or after housing costs (AHC). Income after housing costs aims to measure disposable income after housing costs (rent, service charges and Council Tax for tenants; mortgage interest payments, buildings insurance and Council Tax for homeowners). Income before housing costs measures original income. The government uses both measures in its monitoring of poverty. Neither measure is ideal: the AHC measure overstates the income of homeowners, because the definition of housing costs for homeowners does not include maintenance and repairs, but the definition for tenants does do so through its inclusion of service charges. Equally, the BHC measure understates the income of tenants who tend to have higher housing costs (Burrows and Wilcox 2004). Here we use the AHC measure of income. The first (and latest) ELSA data wave is from In 2003, 60 per cent of the median equivalised BHC household income, using a couple with no children as a baseline, was 194 per week in the Family Resources Survey (DWP 2004b). Unfortunately, this threshold cannot be directly applied to the ELSA data. The threshold could be adjusted to take account of the different equivalence scales used in ELSA and FRS 4. However, the differences in the income measure in ELSA and FRS are not only a matter of equivalence scale; there are more fundamental differences of definition. Net income in ELSA does not include housing benefit and council tax benefit, whereas net income in FRS does include these benefits. From the 2002/03 FRS data, 21 per cent of pensioners were living under the 194 threshold (DWP 2004b). In order to estimate the equivalent threshold for the ELSA definition of income, we therefore use the 21 st percentile income level in ELSA (equivalised individual weekly income of 102). With regard to the budget standard approach, Age Concern and the Family Budget Unit have estimated the amount of income required by pensioners to reach two different standards of living: Low Cost but Acceptable (LBA) and Modest but Adequate (MBA) (Parker 2000, Parker 2002). The LBA standard in 2002/03 prices is very close to the 21 st percentile income level: 105 per week for a single female homeowner aged 65-75, 107 for a single male homeowner aged 65-75, and 155 for a couple (Family Budget Unit 2003). We therefore do not consider this as a separate threshold in the analysis below. The MBA standard is 160 for single female homeowners without a mortgage, 157 for single male homeowners without a mortgage, and 235 for couple homeowners (Parker 2002). It is of interest as a threshold because it allows a higher standard of living than the minimal one allowed for in the LBA standard: The MBA standard of living allows for a healthy lifestyle with the opportunity to play a full part in society. It provides a lifestyle well above the level needed to avoid poverty but well below luxury. For example the budgets allow for two 5 day holiday breaks a year in the UK but not a holiday abroad. They allow for outings and a social life but do not include the cost of running a car. (Age Concern 2002, 2) 4 For benefit units of more than one, total benefit unit income is summed and then equivalised to give the same level of equivalised benefit unit income for each member of the household. Income in FRS is equivalised to the McClements scale, using a couple with no children as a baseline. Income in ELSA is equivalised to the OECD scale, using an individual living in a household of 1 as a baseline. Housing-Rich, Income-Poor 12

13 Age Concern estimated that in 2002, around half of all pensioners lived below the Modest but Adequate standard. The occupational or personal pension that would be required on top of the basic state pension to reach the MBA standard in 2002 would have been 86 for a single female homeowner, 82 for a single male homeowner, and 109 for a homeowner couple. PC did not exist in 2002, but since these amounts would take pensioners above the PC threshold, its non-existence in 2002 does not affect these amounts. An issue with using the headcount ratios outlined above is that although these might be a good measure of levels of pensioner poverty, they are less effective at representing the levels of income that pensioners themselves might consider to be low income. For this purpose it might be helpful to look at replacement ratios: the same income might feel low-income for a pensioner who enjoyed a higher salary, and therefore standard of living, but not for others. For the purpose of this study, which aims to provide an evidence base from which it can be established whether there is a case for government intervention in the equity release/trading down market, this is of less concern. But if ELSA data were to be used to make predictions about the wider market for equity release this would need to be taken into account: a pensioner on the same income and with the same amount of housing wealth as another might be more likely to consider equity release if they are on a lower replacement ratio. Additionally, if a large number of older people face large drops in real income at or during retirement, this could also result in political pressure to alleviate low incomes in retirement, even if these pensioners are on incomes higher than the definitions of income poverty adopted here. Again, this is not the focus of this study. Housing-rich An appropriate measure of what it is to be relatively housing-rich would take into account how much housing equity could typically be released through an equity release scheme. Given that different amounts of equity can be released for different age groups, the measure should ideally be age-related. Typical rates and conditions for equity release schemes are given below. Lump sum lifetime mortgage: lenders typically offer per cent of the value of a property to someone aged 65, 30 per cent to someone aged 75, with a maximum of 50 per cent for those aged 90. Income scheme lifetime mortgage: lenders typically offer 0.13 per cent of property value per month for those aged 65, up to 1.2 per cent of property value per month for those aged 90. Lenders of lifetime mortgages impose a minimum value on the property owned, of at least 40,000. Lenders also usually impose a minimum loan amount to cover the fixed costs of valuation: for example, Prudential impose a minimum initial loan of 20,000 in their Property Value Release Plan. Figures from Age Concern (2003b) For those who have retired, we can extract information about net housing wealth in retirement from ELSA. But for those who have not yet retired, it is likely that they may continue to accrue net housing wealth through paying off a mortgage, and house price inflation. To account for the former effect, we follow Banks, Smith and Wakefield (2002) in using gross housing wealth as a measure of housing wealth in retirement, which assumes that people will have paid off their mortgages before retiring. It should be noted that this method is likely to overestimate housing wealth in retirement. According to ODPM figures, 9.7 per cent of those aged 65 to 74, and 3.6 per cent of those aged over 74, still had mortgages to pay off in If having an outstanding mortgage is negatively correlated with expected pension wealth in retirement, this could be significant. 5 ODPM figures accessed online on 6 September 2006 at Housing-Rich, Income-Poor 13

14 In the analysis below, we consider a single person owning a home worth 100,000 or more to constitute being housing-rich enough to potentially boost income through releasing housing equity. On a typical lifetime mortgage plan, a single person aged 65 should be able to release a 20,000 lump sum. For a couple homeowner, the equivalent benchmark would be owning a home worth 150,000 (each member of the couple has an equivalised amount of housing equity of 100,000). As noted above, the nature of equity release schemes and other methods of releasing housing wealth, such as trading down, means that individuals will not have access to the full value of their property. This amount will also vary according to the age of the individual and the nature of the property. There may also be significant barriers to reducing housing wealth on lower value properties which will form the basis of future ippr research. The financial value of the home is the conventional way of measuring housing wealth. But if a household were to release housing wealth by trading down or taking in a lodger rather than purchasing an equity release plan, the amount of spare capacity a household has as a measure of housing wealth is a complementary measure of housing wealth to the financial value of a property. The ELSA data include information on the number of rooms a household occupies (excluding kitchens and bathrooms). These data allow us to calculate which households have excess capacity, using alternative definitions of excess capacity. Here, we use two definitions: one in which excess capacity is defined as having rooms in excess of one bedroom for the first 1 or 2 members of the household, one bedroom for each further member, and two reception rooms per household; and another as having rooms in excess of one bedroom for the first 1 or 2 members of the household, one bedroom for each further member, and three additional rooms per household (to allow for two reception rooms and one spare bedroom). It should be noted that this measure of spare capacity is fairly crude given that the ELSA data include information only on the number of rooms, not the size of the space a household occupies. Allowing for the effects of financial wealth Any housing-rich, income-poor measure should also allow for financial wealth, as running down financial reserves can provide an alternative source of income to a pension. We run correlations of retirement income/expected pension wealth on retirement with net financial and physical wealth. Pension income for those not yet retired Rather than dividing the ELSA sample into those aged between 50 and the State Pension Age (SPA), and those aged over the SPA, we have taken the decision to divide the ELSA sample into those who are retired, and those who are yet to retire. This is because income is likely to be higher for those who have not yet retired but are over the SPA. Dividing the sample this way allows us to be consistent about our measure of income in retirement: for those who have already retired, it is simply income; for those who are yet to retire, we use equivalised estimated benefit unit total pension wealth on retirement as a proxy for retirement income. Total pension wealth on retiring (both private and state pension wealth) is derived from estimates by the Institute of Fiscal Studies based on the data collected by ELSA (Banks, Emmerson and Tetlow 2005). Assumptions used to produce these estimates include a 2.5 per cent real discount rate and private pension contracting out of the state second tier pension. We assume for those yet to retire and who are inactive that their estimated pension wealth on retiring is equal to their estimated pension wealth should they retire in 2002 at the time of the survey (in other words, they do not accrue any more wealth before retiring). We assume for those yet to retire and who are active in the labour market that they continue to work and accrue further pension entitlements until reaching the SPA. We derive the estimated equivalised benefit unit total pension wealth on retirement using these assumptions. Housing-Rich, Income-Poor 14

15 4. Results Those who have already retired The ELSA wave contained 5,668 core respondents who had already retired 6. As expected, there is a clear, statistically significant positive correlation (at the 95 per cent level) between retirement income and financial wealth. Table 4, below, shows the cumulative income and housing wealth distribution: From this table, we can see that four per cent of pensioners had housing wealth over 100,000 and a weekly income less than or equal to 100 in 2002/03, and just under 15 per cent of pensioners owned housing wealth over 100,000 and had a weekly income less than or equal to 200. Table 4: Equivalised net housing wealth by equivalised weekly income for retired core respondents (as a percentage of all retired core respodents) N=5,668 Equivalised Equivalised net housing wealth (thousands of s) weekly income ( ) >200 >180 >160 >140 >120 >100 >80 >60 >40 >20 >0 All All Totals may not sum to 100 per cent because of rounding Table 5, below, shows net housing wealth for all those retired core respondents living below certain income thresholds: those associated with the 2 nd, 3 rd and 4 th deciles; the median; and the 21 st percentile (21 per cent of pensioners live below 60 per cent of the median for the total income distribution, DWP 2004b). Fairly small numbers of retirees who live in poverty, under the 21 st percentile have housing wealth of over 100,000: 4.2 per cent. However, a significant minority of retirees, 10.2 per cent, live below the Age Concern MBA standard for single male pensioners, which coincides with the median income of 157, and own more than 100,000 of housing wealth. Table 5: Equivalised net housing wealth by equivalised weekly income for retired core respondents (significant thresholds; as a percentage of all retired core respondents) N=5,668 Weekly income ( ) Net housing wealth (thousands of ) >200 >180 >160 >140 >120 >100 >80 >60 >40 >20 >0 All 100 (2 nd decile) 102 (21 st percentile) 117 (3 rd decile) 136 (4 th decile) (median) Totals may not sum to 100 per cent because of rounding 6 Core sample members are those individuals living within the household at the time of the interview born on or before 29 th February 1952: eligible core members who responded to the ELSA survey form the baseline sample for analysis (English Longitudinal Study of Ageing User Guide for the Wave 1 Core Dataset Version 2, 3). Housing-Rich, Income-Poor 15

16 The cumulative income distribution, for all retired core respondents, and for those homeowners whose homes are worth more than 100,000, is shown in Figure 1, below: Figure 1: Cumulative income distribution of retired core respondents Cumulative frequency all retirees all retirees with equivalised housing wealth > 100k Equivalised weekly income Tables 6 and 7 show how many retirees live in large homes relative to their household size by income level. Table 7 shows that using a more generous definition of spare capacity, where a large home relative to household size is considered to be one with more than three extra rooms, 14.1 per cent of retirees are homeowners with spare capacity and live under the Age Concern MBA income required for single male homeowners ( 157). Using a less generous definition, where a relatively large home is considered to be one with more than two extra rooms, this figure goes up to 24.8 per cent. Boosting income through trading down or taking in a lodger might be a possibility for these pensioners (although the potential for trading down, given the fixed costs of moving, depends very much on the value of their home and house prices of smaller properties in their area). Table 6: Retired homeowners living in large homes relative to household size, by equivalised weekly income N=5,646 Weekly income ( ) Homeowners with more than one bedroom for the first one or two members of a household, one further bedroom for each further member, plus 2 further rooms (as a percentage of retired core member respondents) Homeowners with more than one bedroom for the first one or two members of a household, one further bedroom for each further member, plus 3 further rooms (as a percentage of retired core member respondents) All Housing-Rich, Income-Poor 16

17 Table 7: Retired homeowners living in large homes relative to household size, by equivalised weekly income (significant income thresholds) N=5,646 Weekly income ( ) Homeowners with more than one bedroom for the first one or two members of a household, one further bedroom for each further member, plus 2 further rooms (as a percentage of retired core member respondents) Homeowners with more than one bedroom for the first one or two members of a household, one further bedroom for each further member, plus 3 further rooms (as a percentage of retired core member respondents) 100 (2 nd decile) (21 st percentile) 117 (3 rd decile) (4 th decile) (median) Those who are yet to retire In , there were 5,493 ELSA core respondents who were aged over 50 and were yet to retire. Just as for retirement income and housing and financial/physical wealth for the retired group, there is a clear, statistically significant positive correlation between estimated equivalised pension wealth and equivalised gross housing wealth for the notyet-retired group. The same is true for estimated pension wealth and financial/physical wealth, reinforcing the statement that there is no evidence to support the assertion that deficient pension savings by some individuals are being compensated for by non-pension financial savings (Pensions Commission 2005, 20). Table 8, below, shows estimated equivalised benefit unit state and private pension wealth on retiring by equivalised benefit unit gross housing wealth, and Table 9, the equivalised housing wealth distribution for those under the 2 nd, 3 rd and 4 th decile, and median level of estimated benefit unit pension wealth. Table 8: Estimated pension wealth on retiring by equivalised gross housing wealth for core respondents yet to retire (as a percentage of core respondents yet to retire) N=5,493 Estimated Gross housing wealth (thousands of ) total pension wealth >200 >180 >160 >140 >120 >100 >80 >60 >40 >20 >0 All (1000s ) All Totals may not sum to 100 per cent because of rounding. Housing-Rich, Income-Poor 17

18 Table 9: Estimated pension wealth on retiring by net housing wealth for core respondents yet to retire (2 nd, 3 rd, 4 th deciles and median) N=5,493 Estimate d total pension wealth (1000s of ) 70.7(2 nd decile) 90.2(3 rd decile) (4 th decile) (median) Gross housing wealth (thousands of ) >200 >180 >160 >140 >120 >100 >80 >60 >40 >20 >0 All In order to translate estimated pension wealth into a retirement income flow, we need to make a number of fairly strong assumptions about how that wealth is converted into an income. To estimate how much real income a certain amount of total wealth will generate over time, we assume that the entire accumulated pension wealth (both state and private) is used to purchase an RPI-linked annuity, with no tax-free lump sum released from the pension fund on retirement (we use an RPI-linked rather than a level annuity as the level of income provided by a level annuity would be eroded over time by inflation). The annuity rate of the best buy for a 100,000 compulsory purchase RPI-linked annuity ( is 5.18 per cent for a male aged 65, and 4.62 per cent for a woman, giving a mean rate of 4.9 per cent 7. An individual would need a yearly pension income of 8,164 to reach the Age Concern Minimum but Adequate level for a single male retired homeowner. Using 4.9 per cent as a rough estimate of a typical RPI-linked annuity rate of return, this would equate to an accumulated pension wealth on retiring of around 160,000, assuming no lump sum is drawn on retirement. Table 8 shows that 15.6 per cent of those aged over 50 yet to retire will have an estimated equivalised benefit unit pension wealth on retiring of less than 160,000, but net equivalised housing wealth of over 100,000. Tables 10 and 11 show those homeowners living in large homes relative to household size as a percentage of yet-to-retire core respondents, by estimated benefit unit pension wealth on retiring. These figures probably underestimate spare capacity to some extent as those towards the lower end of the ELSA age spectrum are more likely to have dependent offspring who have not yet moved out of their parental home. What is interesting is that a fairly high percentage of those not yet retired, 19.3 per cent, do not have sufficient accumulated pension wealth to provide for the Age Concern Minimum but Adequate standard, given the assumptions above, and live in relatively large homes by the more generous definition. 7 From updated 2 September 2005 and accessed online on 6 October Housing-Rich, Income-Poor 18

19 Table 10: Homeowners living in large homes relative to household size, as a percentage of yet-to-retire core respondents N=5,532 Estimated total pension wealth (1000s of s) Homeowners with more than one bedroom for the first one or two members of a household, one further bedroom for each further member, plus 2 further rooms (as a percentage of retired core member respondents) Homeowners with more than one bedroom for the first one or two members of a household, one further bedroom for each further member, plus 3 further rooms (as a percentage of retired core member respondents) All Table 11: Homeowners living in large homes relative to household size, as a percentage of yet-to-retire core respondents N=5,532 Estimated total pension wealth (1000s of s) Homeowners with spare capacity, assuming no spare capacity to be one bedroom for the first one or two members of a household, one further bedroom for each further member, plus 2 further rooms (as a percentage of retired core member respondents) Homeowners with spare capacity, assuming no spare capacity to be one bedroom for the first one or two members of a household, one further bedroom for each further member, plus 3 further rooms (as a percentage of retired core member respondents) 70.7 (2 nd decile) (3 rd decile) (3 rd decile) (median) The potential for the next generation of retirees, those who are aged over 50 and are yet to retire, to boost their income to an acceptable level by releasing housing wealth, therefore seems greater than for the current generation. 5. Interaction of Released Housing Wealth With The Benefits System An important question for policy-makers is whether the benefits system provides strong (and possibly inefficient) disincentives to release housing wealth. The main benefits for homeowning pensioners that are means-tested, and so whose entitlement might potentially be affected by equity release, are Pension Credit, Council Tax Benefit, and health benefits (CML 2005). These are outlined below. Pension Credit Pension Credit (PC) is means-tested and unrelated to National Insurance contributions. There are two components of PC: 1. Guarantee credit : tops up all those aged 60 or over to a minimum income level of per week for a single person and for a couple. Housing-Rich, Income-Poor 19

20 2. Savings credit : for those aged 65 or over, benefits those who have made modest provision for retirement. Its operation alongside the guarantee credit means that there is a 40 per cent rather than a 100 per cent withdrawal rate on the benefits taper for those with no other means-tested benefits, as used to be the case for the Minimum Income Guarantee which PC replaced (Clark 2002, 15). The means test is mainly income-based, and the income provided from an annuity purchased through equity release would count towards income for this purpose (although the first 20 per week from a lodger is disregarded, relevant for those who choose to release housing wealth through taking in a lodger rather than through equity release schemes or trading down). The means-test also takes capital into account: 1. Any savings of under 6,000 are ignored. For pensioners living in a nursing home this threshold is 10, Any capital over 6,000 is assumed to produce an income of 1 for every 500 or part thereof. All pensioners with a weekly income of less than , including assumed income from capital, will be in receipt of the guarantee credit and/or savings credit (Council of Mortgage Lenders 2005). We can assume that most people who release equity through an equity release plan or trading down will release more than 6,000, given the large fixed costs of equity release. So equity release or trading down would place all pensioners in this income group on the benefits taper, although some would see more benefits withdrawn than others depending on their situation. However, the situation is further complicated by the fact that most of those aged over 65 will have an assessed income period (AIP) of five years, meaning that they are only subject to a means-test every five years, and do not need to report changes in circumstance during this time. An increase in income or capital will affect PC entitlement, but only when the AIP has come to an end. So someone using equity release to release a lump sum, who then goes on to spend it before the end of their AIP, might not find their benefits negatively affected. But there is provision for those who have used this capital in such a way, to be treated as still having this capital if they are deemed to have deprived themselves of capital in order to get Pension Credit: this capital is deemed as notional capital (Age Concern 2003). If the capital is used to pay off a debt or expenditure was reasonable given a person s circumstances according to DWP, then this capital will not be treated as notional. In its guidebook to Pension Credit, DWP gives the example of buying a car: buying a standard car would be deemed reasonable expenditure, but buying a Rolls Royce would render the capital notional. In addition, for all households, not just those with an AIP, capital marked for essential improvements and repairs to the dwelling (cited in CML 2005) is disregarded for up to one year. For example, fixing a leaking roof would qualify, but building a conservatory would not (CML 2005). In February 2005, there were 2,674,100 claimants of PC (DWP 2005). But this figure underestimates the number entitled to PC as a substantial number do not claim. In 2002, around half of pensioners were entitled to PC: DWP (2002) estimates that 50 per cent of pensioners were entitled to PC and Clark and Emmerson (2002) estimate that this figure was 52 per cent. DWP estimates this figure will rise to 60 per cent and 65 per cent in 2025 and 2050 respectively (DWP 2002), and the IFS estimates these figures to be 73 per cent and 82 per cent (Clark and Emmerson 2002) 8. The benefit disincentive to equity release is therefore likely to affect increasing numbers of pensioners in the future. But not 8 The IFS estimates were made before the decision on Pension Credit uprating was taken by the Government, and they assume that both the savings credit and guarantee credit elements of PC would rise in line with earnings. The guarantee credit actually rises in line with earnings, and savings credit in line with the Retail Price Index with a 2.5 per cent underpin. The IFS estimates therefore probably overestimate the number of pensioners that will be entitled to PC in the future. Housing-Rich, Income-Poor 20