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The Actuary The magazine of the Institute & Faculty of Actuaries

Can bequests fill the pensions gap?

T he first report of the Pensions Commission (2004) discussed non-pension saving and housing wealth. The Commission suggested two ways that ownership of housing assets could be relevant to addressing pension adequacy: ‘either via liquidation during retirement or via a bequest of housing assets to inheritors’. Housing equity is unlikely to be liquidated during retirement for three reasons: economic rationality, emotional ties to the family home, and the desire to bequeath.
The Commission’s report concluded that while housing assets may not benefit their current owners, ‘over the long term, the inheritance of housing equity may play a significant role in funding retirement for many people’. Housing assets are unequally distributed and that those without private pensions have less housing wealth than others.
While there is some data on the ownership of assets, there is little data available on people’s attitudes to assets and inheritance. Our study of ‘Attitudes to Inheritance’ has filled this gap. The main component of the study was a survey of 2,008 members of the British public (aged 18 plus) interviewed in 2004. This article draws on evidence from our survey in order to explore whether housing assets or bequests can fill the pensions gap.

Complex, risky, difficult to understand
The Pensions Commission concluded that liquidation of housing assets in later life was unlikely. But our study suggests that people are keen to use some of their assets. They seem aware of possible future pension inadequacy and most see housing as a better way of making financial provision for retirement. While many would like to be able to leave bequests they do not seem willing to do so at the expense of their own enjoyment or need in later life.
Some owner-occupiers have already liquidated some or all of their housing assets. Many more are willing to consider doing so. The equity release schemes that are currently in the market are considered complex, risky, and difficult to understand. But more than six in ten owner-occupiers say they like the idea of such schemes in theory. This suggests that there is scope for developing further policies to enable people to release some equity in later life.

Less is more
Attitudes do, of course, vary. Variations by age suggest that both ageing and generational effects are present. Those least concerned to leave bequests, and most interested in equity release schemes, appear to be those in their 50s and 60s for whom these issues are real and immediate. Younger people are generally more supportive of the concept of inheritance. Those in their 80s, however, stand out as the most committed to the idea of leaving bequests.
As well as differences by age there are considerable socio-economic variations. Those in social class E (unskilled workers and those on benefits), ethnic minority groups, and single parents are less likely than other groups to have assets to leave. But among those that do have something, or who feel that they might in the future, there is stronger support for the concept of inheritance than among more affluent groups.
This evidence suggests that the Pensions Commission is right to be cautious about the extent to which people on the lowest incomes can be expected to liquidate assets in later life. Any policy response needs to take into account (a) that many people on low incomes do not have, or have very few, assets and (b) that only about half of people in these groups seem keen to use assets for meeting their own needs in later life.

Small change
Our survey found that almost half of all respondents had inherited something in the past. But the chances of receiving an inheritance, particularly one of much value, were related to ethnicity, social class, and housing tenure. Those with the most need for extra money were the least likely to receive it.
Most inheritances involved very small amounts but 5% of the public have inherited £50,000 or more (adjusted for inflation) and this could make a significant contribution to living standards in later life and retirement planning at any age.
The Commission is not only interested in receipt of inheritances to date but in what role inheritances might play in the future. The data from this study has not been used, so far, to predict the future but other studies have remained cautious about the prospect of Britain turning into a ‘nation of inheritors’. Holmans (1997) carried out a detailed study of trends in housing, long-term care use, and life expectancy and concluded that while there would be a substantial growth in the number of bequests containing property in the future, ‘ not much more than one-half of all non-married men and women even a quarter of a century hence will leave owner-occupied house property’.
Receipt of inheritance therefore currently benefits those with least need of a windfall and it seems that it will be many decades before inheritances will reach many of those who need them most.
If receipt of inheritance becomes more widespread there is a possibility that people might expect to receive something in the future and so feel that they do not need to make their own financial provision for later life. If the expected inheritance then fails to materialise these people might have nothing to fall back on. Our survey suggests, however, that few people currently feel sure that they will receive an inheritance in the future.
Those with the greatest expectations seem to fall mainly in better-off groups such as home-owners whose parents are also home-owners. But even these groups are still generally disinclined to count on receiving an inheritance. There is therefore little evidence, to date, to suggest that people are changing their financial behaviour because they expect to receive an inheritance.

Enjoying life
One of the main groups within the debate on pensions is that of people of working age who have no private pension coverage. We have therefore carried out some targeted analysis of the data comparing people of working age with and without private pension coverage. By private pension coverage we mean people who belong to their employer’s pension scheme, or are currently contributing to a personal or private pension plan.
Figure 1 shows that people of working age with private pension provision are more likely than those without to have property or savings that they could leave as an inheritance. This is in line with findings from the Pensions Commission that those without private pensions have fewer assets either to draw on themselves or leave to others. In our survey, however, many of those without private pensions were hopeful that they might have some assets in the future even if they did not currently have any.
Among potential bequeathers, those with private pensions are more likely than those without to say that they will enjoy life and not worry about leaving a bequest (see figure 2). This is in line with the findings quoted earlier: people with least to leave are most keen to leave it. Nevertheless, a majority (63%) of potential bequeathers without private pensions say that they would enjoy life and not worry about leaving a bequest. This suggests that they are prepared to use up at least some of their assets during their own lifetime.
If we focus on owner-occupiers of working age, we find that a third (32%) of those with private pensions say that they would consider accessing equity by moving to somewhere smaller (see figure 3). Almost a quarter (22%) of those without private pensions say the same. There was little difference between the two groups’ views on other ways of accessing equity. So once again there is some interest in accessing housing wealth in different ways among both those with and without private pensions.
So far, we have looked at attitudes to assets and inheritance. Now we turn to actual receipt of inheritance. Surprisingly, there was little difference between working-age people with private pensions and those without private pensions in their chances of receiving inheritances (see figure 4). Those with private pensions were a little more likely to have received something than those without (46% compared with 41%). But one in 20 in both groups had received at least £50,000 (adjusted for inflation). For those without private pensions this could make a substantial difference to their future finances.
As mentioned earlier, people with high expectations of receiving an inheritance might decide not to make financial provision for the future. We analysed expectations of inheritance by pension coverage. Our analysis shows that those without private pension coverage actually have lower expectations of receiving an inheritance than those who do have private pensions (see figure 5). We therefore found no evidence to suggest that expecting an inheritance reduces pension planning, though a variety of other factors may be relevant here. For example, it seems that better-off people are more likely to expect an inheritance and are better provided for in pensions, and this may outweigh any other factors.

So will the gap be filled?
Owner-occupiers seem more interested in liquidating their assets than previous research has suggested. And some people are prepared to liquidate their assets in later life to supplement their income.
Housing assets will not, however, fill the pensions gap for those on the lowest incomes as these groups are least likely to have such assets and among those that do, there is more support for the concept of inheritance than among more affluent groups.
Bequests will also fail to help those most in need of a windfall as inheritances currently benefit only the most affluent groups.