Most people will not be able to rely solely on the equity they have in their home to sustain them throughout their retirement, a report published today by the Pensions Policy Institute suggests.

Despite the recent surge in property prices, the report concludes that the majority of people will not have enough housing equity to allow them to retire without saving in other assets.

As well as this, the PPI says pensions are better in the long term. Since 1970 pension funds have risen by an average of 11.6% a year, while homes have grown by 11.1%.

The report, Property or Pensions? investigates recent trends in property and pension wealth, and analyses the ways in which property can be used to provide an income in retirement.

Although more wealth is held in housing than in private pensions, not all housing wealth can be converted into an income. Equity release products typically allow only 20% of the house value to be realised at age 65.

Housing wealth – like other forms of wealth – is not evenly spread. Most houses are worth less than £130,000. Only 10% of homes are worth more than £330,000, which is how much is needed for equity release to provide an income of £100 a week.

Director of the PPI Alison O’Connell said: “Saving in property is often proposed as an alternative to saving in pensions. But only a (wealthy) minority will be able to invest in property other than their own home.”

“For most people, owning a home contributes to retirement by reducing the cost of living compared to renting.”

“Not everyone wants to release housing equity – and it does have risks – but it could be used to reduce the amount of pension saving needed to meet a target retirement income.”

“Even so, today’s average levels of pension saving (around 7-8% of salary a year) could only be enough to fund a two-thirds final salary retirement income for a forty year old if he or she can release equity from an average value house and retire at age 67.”

“For most people, property will be at best a complement to occupational or personal pensions, not a substitute.”

To illustrate:

Someone starting pension contributions today at age 40 could need to save 19% of salary each year to achieve a total pension (from the state and private savings) at age 65 of two-thirds of final salary.

After taking account of possible equity release from an average value house, the required contribution rate falls to 13% of salary each year.

However, this is still above the average rate of pension saving of 7-8% of salary a year. With that level of private pension saving, as well as equity release from an average value house, he or she could reach a total pension of two-thirds final salary only by working to age 67.

This assumes the value of houses and pension funds increase at today’s ‘best estimates’ of long-term future growth. Both property and pension saving have risks.