Chris Knight

Chief Executive Officer, Legal & General Retail Retirement

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The generation game

Speaking at the Later Life Lending Conference, Chris Knight discusses how people find difficulties in talking about inheritance within our families; because it involves thinking about events we would rather not think about. The reality is, that it's a subject that can unlock over £1tn in UK housing.

It is very hard to talk about inheritance within our families because it involves thinking about events we would rather not think about.

I am by trade an Actuary and I have spent a life in business looking at issues like inheritance, longevity and risk. And even I struggle to have these conversations with my own family, especially my Mum. And it means that we, like many families, have locked ourselves into comforting, but economically sub-optimal outcomes, because it’s just too difficult to talk about.

Millions of us spend thirty or more years working towards paying our mortgage off so that we own our homes outright in retirement. And then, we choose to deny ourselves the partial benefit of our greatest asset - our home – just when we need it the most…. and we say we do this because we want to leave an inheritance for the next generation.

Maybe, if we could figure out a way to talk about this stuff more openly, we might figure out some facts about this cycle – this Hamster Wheel we’re all stuck in - and the facts suggest another reality: it would be easy to think that every ‘family home’ transferred, neatly and intact, is an inheritance for the next generation. However, recent research shows that only 23% of older people actually think that the homes they pass on will be lived in by those they leave them to.

Assuming that this is right, we need to have a huge conversation – as a society. If so many people think their home is simply going to be sold straight away by the people they leave it to – that all those memories and Christmases will be traded for cold hard cash - then why do we feel so guilty for treating our houses, at the right time, more like an asset?

Vast amounts of wealth – over £1 trillion for retired people – is locked up in UK housing. This bow-wave of property wealth has arisen in part because of the extraordinary size of the boomer generation – those born 1946 to 1964 – and is really only just working its way through the economic and social system.

Generation X are still recovering from the wages stall of The Great Recession. And millennials are laden with student debt and unable to afford to get onto the property ladder. Millennials are half as likely to own a home at age 30 as baby boomers were.

In the 1980s it would have taken a typical household in their late 20s around three years to save for an average-sized deposit. It would now take 19 years. Millennials are spending an average of nearly a quarter of their net income on housing, three times more than the post-war silent generation did when they were in their 20s. It’s not so much a Generation Game as a Generation Waiting Game.

Now, of course, this housing wealth is going to be passed down to the next generation because you can’t physically take your house with you when you go.

Financial services can help families to figure out a process so that they can take control of the ‘how and when’ of the wealth transfer. The cornerstone of many family’s plans should include using a former family home as a financial asset. Treated respectfully, carefully and wisely, it can make a real difference to home owners in the first decades of their retirement AND to the younger generation who could receive money when it really makes a big difference – in their working life when they have the pressures of their own mortgage, their own commitments and their own children.

And Later Life Lending can also play a part in resolving that other great challenge of our time: the climate emergency. We know that much of our housing stock is not in great shape, both in terms of not being fit to live well in, and also in terms of energy efficiency. Sadly, much of the poorest quality housing is lived-in by older people. Across the UK, it has been suggested that £13bn will need to be invested every year between now and 2050 to bring homes up to the standards required to meet the Government’s overall legally binding net zero carbon emissions target. If customers could borrow, for example, £15,000 towards retrofitting their home and lifting the EPC rating, this would be good for the customer, for their energy bills, and for the lender too as it enhances the value of the house itself.

The potential benefits of later-life lending to families and the wider economy and even the environment seem huge and clear to see. So what can we do to unlock both demand and supply?

We must start by rejecting the ‘one size fits all’, approach to supporting people as they get older. People after 65 will have as many phases in their life as people during their youth or during their working age; they will have different needs at different times. At 65 they might want to continue working and not even think about retirement. At 75 they might want to travel, so they might need to free up some funds.

At 85 they might need to pay for domestic care – again another change in finances. And at 95 they might want to live in a new environment better suited to their needs.

And it is in this new landscape that the future of Later Life Lending will be written. 

Any robust personal financial strategy is only as good as its response to the hectic and surprising realities of life. Lots of things – good and bad – happen: from divorce, to loss of health, to windfalls and gifts, to helping a relative, or mending the car after a failed MOT. The list is a long one.

To deal with a solvency crisis you need to plan ahead with, for example, insurance or an annuity. While the problem may be de-risked, it can be a big upfront cost.

A liquidity crisis could be averted by having a rainy-day fund. However, establishing such a fund means foregoing investment returns, thereby maybe depressing savings and lifestyle, and could therefore itself contribute to a solvency crisis later down the line. 

During a person’s working age they could, perhaps, do some overtime to cover an unexpected outgoing but, for a retired person of 85, say, this might not be so straight forward. Fixed incomes makes it really important to have a financial plan for a solvency issue like major care costs or a liquidity problem like wanting to help children to buy their first home.

For many people, the better option is to access liquidity at the point of need; hence the role of Later Life Lending. Our challenge then is creating a system that makes accessing liquidity quick and efficient, including often to meet relatively small needs for liquidity in absolute terms.

Government data shows a downstairs bathroom conversion costs just under £11,000. Spending that money could help someone to stay in their own home for longer, rather than entering residential care at £659 a week.

However, many families would find £11,000 to be a liquidity crisis. Our average customer has £200,000 in housing equity and £60,000 in pension savings when they retire. A few years later, the need to find £11,000 could create a significant knock in lifestyle.

I strongly believe we can help people to see that they can BOTH leave something to their family AND use some of what they have worked for to have a better life in retirement.

We need to make it easier for people to access their housing wealth, especially in small amounts, so we can help stop those relatively minor liquidity issues for people from turning into solvency issues for themselves, their families, and for society. We think that there could be a case for creating a system of advice that supports people who need to borrow smaller amounts. As things stand, if an older person wants to borrow £11,000 from their housing equity, they have to go through the same process and much of the same expense as they would if they were borrowing £111,000.

Each generation works hard so that the next gets a better deal, until today - our younger generations are getting a worse deal than their parents – the intergenerational contract is under real stress. It doesn’t have to be all doom and gloom, though. The ageing population is the biggest opportunity out there to create a better society. With fresh thinking designed around the realities of peoples’ lives today, we can make sure that the Generation Game doesn’t become the Generation battle.  With more choice for older people, we can make a better intergenerational deal than the one we inherited.

I am by trade an Actuary and I have spent a life in business looking at issues like inheritance, longevity and risk. And even I struggle to have these conversations with my own family, especially my Mum. And it means that we, like many families, have locked ourselves into comforting, but economically sub-optimal outcomes, because it’s just too difficult to talk about.

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