If the government had any hope the economic concerns of the UK electorate were easing, it had a nasty jolt yesterday when not one but two reports highlighted serious concerns about the way in which voters are being left out of pocket by falling annuity rates and the recent rise in house prices.
The first report from the Institute of Fiscal Studies claims only 9.8% of the next generation of pensioners will be at risk of having an inadequate retirement income because, in part, of the recent rise in property prices.
But those who have a private pension from which they are not yet drawing an income may be over-estimating by as much as 20% the income they will receive from their pensions.
The IFS says these discrepancies could either be because individuals intend to increase significantly their private pension contributions between now and retirement or because they are overly optimistic about future investment returns and annuity prices.
The IFS also warns there is substantial inequality in pension wealth: the 10% of individuals in families with the most family pension wealth (state and private) have, on average, £874,000, whereas the 10% of individuals in families with the least family pension wealth have just £50,000.
At the same time, however, a second report released yesterday by the Joseph Rowntree Foundation (JRF) suggests the recent rise in property prices has also put some 1.25m younger people in the position of having an incomes which is too high to qualify for housing benefit if they were living in 'social' rented accommodation, but too low to afford a mortgage on even the cheapest two or three-bedroom homes for sale in their area.
The JRF is calling on the government, regional planners and housing providers to re-consider their strategies to take account of the growing number of young, working households who cannot afford local house prices.
According to the study, just over a fifth of households aged under 40 are affected across Britain while in London, the South East and South West regions, one in three are potentially part of an alternative 'intermediate housing market' for those who cannot afford full ownership.
The report also estimates nearly 60,000 newly-forming young households each year find themselves in this situation.
The research identifies a league table of 40 districts - all but one are in the South - where 40% or more of younger working households are unable to afford local prices at the lowest 'decile' (the 10% loan-to-value point for a mortgage) for two or three-bedroom properties.
To add to the government’s woes, the IFS report says people with low pension wealth tend not to have high levels of housing or other wealth to compensate; they tend to have lower levels of other assets as well.
As a result, total wealth appears to be very unequally distributed as the 10% of individuals in the wealthiest families have at least £1m of family wealth compared with the poorest 10% which have less than £110,000.
Moreover the least wealthy have lower expectations of remaining in employment and lower expectations of receiving an inheritance than their wealthier counterparts, says the IFS.
Professor Steve Wilcox of the University of York and author of the JRF study, says his analysis reveals a 'yawning gap' in the market for intermediate housing products such as shared ownership and attractively-priced private renting, which is potentially much larger than previously recognised by government or housing providers.
“At the very least the figures justify some new and creative thinking on ways that the current range of intermediate housing products could be expanded to appeal to the growing number of young, working households who simply cannot afford local house prices," he adds.
Gemma Tetlow, one of the authors of the IFS report, also says: “Within the group currently aged between 50 and the state pension age, we predict that around 730,000 individuals in England will have retirement income that is lower than the benchmark used by the Pensions Commission. However, despite this, we find that many individuals may not receive as much income from private pensions as they expect, unless they plan to change significantly their behaviour over the next few years.”
At the same time, the JFR study notes overall ratios of house prices to working household incomes are at record levels nationally.
The impact of higher house prices has been reduced by low interest rates, but mortgage cost to income ratios last year were, nevertheless, close to the peak levels last experienced in 1990. Local house prices to household income ratios for younger working households also exceeds five to one in 33 districts.
Lord Richard Best, director of the Joseph Rowntree Foundation, says: “If large numbers of households are not to miss out on the benefits of home ownership, then much greater efforts - and probably much more public money - will be needed to give them a break."
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Matthew West on 020 7484 9893 or email [email protected].IFAonline
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