Andrea Rozario looks at what considerations need to be taken into account when planning to take out equity release
It has been well documented that the drivers for equity release are likely to increase in the coming years. This is mainly a result of previous high house price inflation, an ageing population, the pensions crisis and lack of provision. However, more recently the effects of low interest rates have been disastrous for those relying on an income from their savings. The current drop in house prices may affect how much the consumer can release from their property, but it does not reduce the drivers or reasons for why people look to equity release.
Baby boomer attitudes
We have all heard of the 'baby boomer' generation but I don't think we realise just what changes their attitudes are going to have on how we plan for retirement. Advisers are well aware of what options need to be discussed and considered when a client is thinking about retirement and equity release has to be very much a part of this process, especially when you consider that housing equity is still many people's biggest asset. In fact 26% of UK homes are owned outright by their owners delivering over a trillion pounds in property wealth. (Prudential 2008)
According to the Wanless Review 2006 the number of people aged 65 and over is estimated to increase by 47% by 2026. That is a lot of people heading for retirement, and unfortunately many of them are likely to still have mortgages and unsecured debt such as credit cards and loans. In fact the increase in debt among the over 60s is a worrying trend with the National Debt Helpline stating that the biggest rise in callers was from those aged 60 and over. For these people equity release can free them from monthly payments that would otherwise have made retirement very difficult.
There are also many other factors that need to be considered such as:
- Longevity - how long is the client likely to live and what do they want for their future? Obviously none of us have the answer to this but it's a common misconception among the retired that they think they will have a shorter life span than statistics show. According to Professor Simon Biggs at Kings College London most baby boomers will spend 20 years in retirement. When considering retirement options, it is important that all assets are considered. The client also needs to think about the length of time they will need to rely on these assets, the impact the market may have on the assets and their changing needs over the years. If equity release is to be part of their retirement planning, the impact of longevity must be discussed with the clients so they understand any equity they take at the outset will obviously not be available in the future. Customers then need to prioritise their needs.
- Expectations - what type of lifestyle do the clients want? More importantly what can they afford? According to research 66% of baby boomers want a leisured lifestyle and their biggest concern, (46%), is having enough money to maintain the standard of living they previously enjoyed. (Kings College - Facing Retirement Forum 2008). Equity release can play an important part in helping people to maintain an acceptable standard of living. The flexibility of drawdown products means customers do not have to take more than they need from the outset and can get at the remainder as and when they need it in small flexible chunks.
- Existing and future health needs - has the client made provision for their long term care? When discussing a customer's retirement planning it is vital to take their health into account. If someone is already in ill health then equity release may be an option that will help them pay for a level of care they need immediately or to pay for adaptations to the home. There are equity release plans available for those with impaired lives that will allow customers to release more equity due to their reduced life span. Naturally equity release is one option and it is important that the clients have explored other help such as that from the state, family, grants etc along with consideration of what will happen to the remaining partner.
Security of tenure
The benefit of equity release is that the plans are written in joint names so the remaining partner will know they have security of tenure, but they need to consider if they are likely to want to access equity at a later date. For those already in good health but at the point of retirement, they still need to consider what may happen to them in the future and the possible need they will have for tapping into their housing equity to pay for domiciliary care.
- Family issues - can their family help them at a later point in life if they should need it? This may be financially or with care. The rise of the 'Sandwich Generation', those that still have dependent children and elderly parents has placed a sector of our society under immense pressure. Those that fall into this category are generally aged between 40 and 55 and it is estimated that approximately 23% fall into this category. Equity release can help to relieve this pressure by allowing the elderly parents to pay for domiciliary care they may not have otherwise been able to afford.
It could well be that there are no family, in fact the rise of childless pensioners, according to the Pensions Commission will double from 10% to 20% over the next 20 years. This takes away any inheritance issues. However, this is likely to be less of an issue in any case due to the baby boomers' attitude to inheritance being far less of a priority than previous generations. In fact the term 'SKIng' Spending the Kids Inheritance sums up their attitude. Often baby boomers feel they have done all they can for their children and now it is their turn, in which case they will naturally consider equity release as a logical decumlation option.
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