When one door closes, another one opens. An old adage, but a true one.
The Budget may not have closed the door on annuities, but it could certainly be said to have left them with a narrower space to squeeze through. At the same time, it might just be that another door has been opened for equity release...
Arguments continue over whether easier access to pension funds will generally result in higher levels of overspending and eventual hardship.
From April 2015, clients are due to be able to take their entire defined contribution pension fund as a lump sum at the age of 55, with 25% of the fund tax-free and tax to be paid at their marginal rate on the rest. Though still subject to consultation, this would be regardless of the size of the fund, or whether the client has other sources of income.
The negative scenario, of course, is that if some people do go on a spending spree they may well find themselves short of income as their retirement progresses – especially given increases in longevity and the fact that many people move into retirement without having first cleared secured and unsecured debts.
Are clients ignoring their biggest asset?
Advisers are well used to encouraging their clients to see the long term picture. But this doesn't just mean encouraging thrift. Perhaps the more difficult task is helping clients to look on their asset portfolio in a new light – one which includes their property as well as their pension fund.
Aviva's recent Real Retirement Report shows that the average value of homes owned by people aged over 55 is now £240,641 – more than £60,000 higher than the national average overall according to the Halifax – and 66% of them own their home outright.
This would be a shift in thinking which could help allay worries about inadequate pension provision for the latter years of retirement.
Including equity release as a potential source of income in retirement can also help clients to expand their priorities beyond merely maintaining their own lifestyle.
For instance, people approaching retirement may be conscious of the pressures facing their children as they strive to gain a foothold on the property ladder, or to pay off debts. Equity release can help them to help their family as well as themselves.
Moving into the mainstream
For some time now, the door for equity release has been ajar, if not wide open. With growth of around 35% from Q1 2013 to Q1 2014 being reported (see references, below), the market seems buoyant. But despite this strong progress, most advisers would agree that equity release has only scratched the surface of its true potential.
We will be much closer to fulfilling true market potential once equity release products are widely recognised as legitimate tools to be used alongside other potential sources of income – rather than as a last resort when the pension fund has been emptied.
To do this, advisers may need to spend some time dispelling the 'myths' associated with equity release – many of which were built upon the negative features of long outmoded products.
It's perhaps surprising how many clients believe that taking out an equity release product means that they would no longer own their home, or that they might leave their beneficiaries with debts if property prices were to go down.
Something to thank the Chancellor for?
It remains to be seen whether easier access to pension funds will indeed result in a dramatic draining of pension funds in early retirement. But, by opening this particular can of worms, the 2014 Budget may well have prepared the ground for advisers to help clients consider a fuller range of retirement income options – based on their property as well as their pension fund.
Aviva's equity release shake-up
For details on Aviva's recently revised range of equity release products visit our dedicated site for UK financial advisers.
Equity Release Council (click here for more information)