Homeowners are increasingly seeing their homes as their pension pot. Is this a good thing?
Assuming you're a homeowner, if you totted up your total net worth right now, how much of it do you reckon would be tied up in the value of your house? According to the UK insurer, Prudential, more than half of our personal wealth is now locked into bricks and mortar - and they predict that it'll be as much as 60% by 2009.
Ten years ago it was about 40%. Back then, the rest of our personal wealth was invested in assets such as shares, savings, pensions and life insurance. But, considering what's happened to house prices (up), and share prices (up, then down, then up) over the last few years, it's not hard to understand why property ownership has turned into what I like to call these days, 'the People's Pension'.
Over the past decade, homeowners have increasingly come to regard property as their future pension pot. In the process, some have also become accustomed to borrowing against the increased value of their homes to fund their spending, pay off debts or finance home improvements. Home ownership appears to have beome the bedrock of financial security. Is this a good thing though?
This week, the Financial Services Authority takes over the regulation of Home Reversion Plans - which is a way of turning the equity in your home into cash that you can live on when you reach old age. That's if you haven't spent it all before you get to old age!
With Home Reversion Plans, you sell all, or a percentage, of the equity in your home to an insurance company for a fixed sum or a monthly income (or both) although you retain the right to live there for the rest of your life. If you decide you want an income, you usually have to buy an annuity from the reversion company - so you have to bear in mind that if you drop dead soon after, then you won't get the full value of the plan.
The problem with this sort of scheme is that you won't get anything like the full market value - perhaps just 40% to 60% of what your home is currently worth. And the younger you are, or the better your health, or if there's a spouse or partner involved, the less you'll get. The company also benefits from any increase in the value of the part of your home that you sold, and you - or your estate - only benefit from whatever part you keep.
So, to ask the question again, is it a good thing that so much of our money is apparently tied up in our homes? And should we regard our homes as our pension pot?
To my mind, if you're prepared to sell up and move to a smaller home - or if you have invested your money in other assets as well - then it's no bad thing to have a substantial amount of your assets invested in property. But, it's not so good if you don't want to move and equity release is your only option for a more comfortable retirement.
Still, at least the Home Reversion Plan is now coming under the scrutiny of Financial Services Authority. Older people with much of their money invested in their home should now stand a chance of getting a better deal than they did before, should they opt for a reversion. I still wouldn't put all my money into property though!