Simon Little discusses the role of equity release in a retirement planning strategy
The growing interest in the equity release market and products continues apace with both consumer and financial intermediary interest growing by the day. Indeed only recently the IFS School of Finance reported that demand for its equity release qualifications has been incredibly strong over the past few months. At the end of the second quarter of this year SHIP was reporting a 14% growth in business over the first quarter of the year with over £275m worth of equity release business completed. Some commentators are now quietly suggesting that maybe we are beginning to witness the long awaited growth in a market that has promised much but failed to deliver its true potential so far.
Considering that early equity release products were launched some forty plus years ago, it is amazing to think that we are only now beginning to talk about the real potential for this market.
In addition to consumer demands we now see financial intermediaries showing a greater interest in this market partly due to the demise of the mortgage market and the slowdown in personal savings. It is also because their customers are now knocking on their door requesting advice on how they can increase income in retirement, often to meet the ever-growing costs of living.
Of course one of the main drivers for the interest in equity release is due to the lack of pension provision, either as a result of inadequate pension saving or the withdrawal of final salary pension schemes, or a combination of both. This is a situation which will become significantly worse for many as they reach retirement in the next few years.
This is a prime reason why equity release should be viewed as part of the retirement planning process in the same way as personal pensions and privately accumulated savings are. When viewed like this, equity release becomes far more of a financial planning tool than a product of last resort, which has been how many have viewed it to date.
The term 'equity release' is probably out-dated and while it is a deft description of the product, 'it does what it says on the tin', it doesn't capture what today's equity release products are often used for. A better description might be 'Home Retirement Plans'.
Perhaps another way of looking at this, from a financial intermediary's perspective, is to view a client's home as just another asset class that can be used to provide adequate funding in retirement.
To demonstrate this point, the average pension fund at retirement is just £30,000 and many people have less than £1,000 in savings, while the average house price in the UK currently stands at around £169,000. This of course ignores any debt that they may have.
For typical retirees the options available to them are fairly limited if they want to do more than just survive in retirement. Of course there's the state pension, pension credits as well as various forms of benefit, but these will hardly boost anyone's standard of living. For the lucky few, retirement will be something to enjoy but for the vast majority of individuals retirement is like facing an oncoming juggernaut in a blind alley. In short, not a pleasant experience and one to be avoided at all costs.
It is beyond comprehension that financial advisers are not now discussing the option of equity release as part of the retirement solution for many of their clients. Necessity is a great leveller and the embarrassment of considering such products by financial advisers and clients alike is now receding as is testimony to the growing numbers of financial intermediaries looking to become qualified in this market.
For many it is not unreasonable to look at one's home as a valid form of saving that has been loved and nurtured which can now be used to redeem some of its investment value by being seen as an alternative retirement vehicle.
Releasing equity from one's home is the third way to meet retirement aspirations and needs.
How & why equity release is growing in popularity and demand
- highest-ever retired population at 12 million and rising;
- growing number of retired homeowners who can't meet cost of living rises;
- large numbers of pensioners living on inadequate pensions;
- large numbers of retired homeowners looking to maximise retirement years;
- out-of-date and insufficient benefits system;
- retired homeowners helping children/grandchildren get on housing ladder;
- increasing number of homeowners looking to mitigate inheritance tax.
UCITS rules need changing
Scope for change post-Brexit
To tackle liquidity issues
More than £100m in pipeline
DB data published last week