Advice requested for income

jem16

EdInvestor wrote:

I'm afraid there's a distinct lack of realism on this thread, to be quite frank. Most people are quite unable to earn and save enough these days to acquire adequate pensions and other capital resources as well as a wholly owned property, so that they can leave the capital in their house out of the retirement income equation.

Why is that though?

My husband and I had to watch every penny for over 10 years whilst I stayed at home to look after my sons. When I returned to work I tried to pay extra into my pension to make up for those missed years. It wasn't easy and there was a lot of luxuries we did without.

Nowadays my colleagues take about 6 months maternity leave and return to work.

dunstonh

Missed a lot of posting on here today...

I'm afraid there's a distinct lack of realism on this thread, to be quite frank. Most people are quite unable to earn and save enough these days to acquire adequate pensions and other capital resources as well as a wholly owned property, so that they can leave the capital in their house out of the retirement income equation.

The lack of realism is the assumption that people are unable to save for themselves. Yes they can save if they want to. However, it's all to easy not to save but it takes a bit of effort to save.

To encourage people not to save money and rely on your primary residence as a guaranteed source of future income is disgraceful.

ReportInvestor

dunstonh wrote:

To encourage people not to save money and rely on your primary residence as a guaranteed source of future income is disgraceful.

Not that the OP's m-i-l has the option to save money :rolleyes:

EdInvestor

Let me try to explain why I think the idea that equity release should be a last resort and represents failure is misguided and outdated. It has to do with basic economcs - the global switch to the low interest rate/low inflation environment.

Take a couple towards the end of the last century, only six years ago.They had a house worth 200k ( more than double the average), a pension fund worth the same, a good entitlement to state pensions and some extra savings plus a maturing endowment. They expected to stay in their home in retirement and leave it to their kids when they die. Their pension fund would have paid an income of 20k a year, topped up by the state pensions and their cash was earning 6-7% on deposit.


Check the same people out now.

The pension income they can expect from their 200k fund has halved to 10k a year because annuity rates have reacted to the low interest rate environment by collapsing to half their oriiginal level. The value of the fund itself may well be much lower - and the same is the case with the endowment. Interest rates on their cash are in the 4.5% range.

But at the same time the value of their home has doubled. (Thank God!)

Can you see that there has been a transfer of value here due to the change in economic conditions? THe overall wealth of the couple is probably much the same - but the distribution of it has changed dramatically.

The assets that were supposed to generate the income aren't doing the job.Plus their relative value has been transferred to another asset (the house) which wasn't intended to generate income.

Thus the development of equity release is very welcome as it enables people to access the new value in the home and use it to generate income to make up for the shortfall in the pension, without actually moving.[Many people will not be be able to realise a meaningful amount of extra capital by trading down as the prices of cheaper homes have gone up too - often by even more than middling homes.]

It's really IMHO quite unfair to suggest people are failing, or not saving enough, when they are just reacting to a major change in the way the economy works.

This major change is also the reason for the collapse in final salary pensions, as it now takes double the amount of money to provide one of these as it did six years ago - hence these big deficits. They are simply uneconomic. The new reality also means that the index-linked state pensions have become much more valuable benefits than they used to be.

We are in a new world.

cheerfulcat

dunstonh wrote:

The lack of realism is the assumption that people are unable to save for themselves. Yes they can save if they want to. However, it's all to easy not to save but it takes a bit of effort to save.

Quite! Saving has never been easy - it's about denying yourself a few nice things now in order to have a bit of " wiggle room " in the future.

To encourage people not to save money and rely on your primary residence as a guaranteed source of future income is disgraceful.

I agree. Certainly I wouldn't call anyone who uses equity release a failure, but making a conscious decision not to make provision for the future and planning to use equity release in place of a pension is madness, and I would not encourage anyone down this road.

Having said that, in this particular case I can see an argument for buying a house now with a view to using equity release later, assuming m-i-l has sufficient income for her current needs.

EdInvestor

making a conscious decision not to make provision for the future

I'm sure you don't really think that buying a house does not involve making provision for the future, CC.You might also have noticed the very high prices of peoperty these days?

Saving anything on top of paying the mortgage can be very hard for young people.Indeed one of the most popular ways to save these days is by paying off the mortgage early.

This gives you a guaranteed return higher than the savings rate and not far off the projected return from risk investments these days. The latter is much lower than it used to be of course, due again to the change to the low inflation/ low interest rate environment.

cheerfulcat

I'm sure you don't really think that buying a house does not involve making provision for the future, CC.

It is not sufficient.

Saving anything on top of paying the mortgage can be very hard for young people.

It's always been hard. Trouble is, people are living for the present and not giving a thought to the future. They need to be encouraged to save now, not told that they can eat their cake and have it, i.e. spend your cash now and your house will take care of your old age. In any case, it is a very bad idea to have all of your capital tied up in one asset.

jem16

cheerfulcat wrote:

It's always been hard.

I would agree here. 25 years ago when I first bought a house, interest rates were at around 16%. I didn't have much saved so couldn't benefit from these rates but I had a mortgage with very high interest repayments.

dunstonh

The first few years after starting the mortgage are always hard. The difference now perhaps is that with credit so easily available, some go out and buy everything new whereas in the past, family members gifted furniture and household items (new or second hand).

It does not take a big lifestyle change to save £50pm.

jem16

dunstonh wrote:

The first few years after starting the mortgage are always hard. The difference now perhaps is that with credit so easily available, some go out and buy everything new whereas in the past, family members gifted furniture and household items (new or second hand).

That's true. We started off with a lot of items gifted to us - specifically remember a couch & chairs, folding table for eating off, twin tub that someone was getting rid of. My mum made all the curtains. My fiance lived in the house for about 6 months before we married as it was more sensible to stay there than the rented accommodation he was living in.

We also had some wedding gifts. It was a couple of years before I bought a new 3 piece suite after saving up for it.

Today a lot of young people just buy everything on credit as they want everything new and want it now.

OMG - I'm beginning to sound like my mother