Keith Haggart discusses the trends which could act as catalysts for growth in the equity release market
The baby boomer generation has arrived, and with it comes one of the biggest shifts in the demographics of our retired population. This is a generation that has benefited from excellent economic conditions and unprecedented growth in property, and as a result they have lived with life's little luxuries. Arguably, this is the first generation with the cultural wherewithal to radically challenge traditional notions of ageing.
So is it true to say this generation is about to reinvent retirement? Absolutely. As Alan Greenspan, former chairman of the Federal Reserve, perhaps somewhat dramatically noted, "Almost all the developed world is at the edge of a demographic abyss for which there is no precedent".
The industry consensus is that the equity release market should benefit from this 'baby boomer' economic and cultural shift. It's not a question of 'if' but a question of 'when' this market booms, and the increase in innovative and flexible products, as well as the number of providers, only serves to underline this.
The Which? Report (published in September), suggested that equity release should still be a product of last resort, but this was quickly refuted by industry experts as being an outdated view. It is certainly not the experience of advisers and providers, and recent product innovation providing flexibility and consumer protection has brought equity release products into the mainstream.
Perhaps this is one of the first examples of the baby boomers generating a cultural shift? The previous retired generation baulked at the idea of eating into their inheritance, and those who ended up doing so did with a certain amount of embarrassment. The up and coming pensioner population is less likely to feel that way, mainly because they can't afford to if they are to enjoy their retirement to the full and still manage to finance two or three decades with a potentially dwindling income.
Another reason for this shift in perception is that people simply do not want to leave their homes. In the past downsizing was associated with moving to a more manageable property as opposed to being a financially motivated decision. Our retiring baby boomers are fit, and more than capable of maintaining their properties. Indeed, a recent survey by Prudential showed that only 8% of customers over 55 years old would be happy to move home. Reasons cited for wanting to stay in their property included 'friends and neighbours' (39%), 'the upheaval' (39%) and 'I've put so much work into my home' (23%).
More and more people are using equity release as a means of staying put. They are viewing their property as their pension and are drawing down on it as and when required.
Increased longevity and pension inflation
If ever there was a time for people to be reminded that money does not last indefinitely, now is it. The impact of inflation on a level annuity will see pensioner income decline in real terms very quickly. Releasing money from their property may be the only way to address the difference, and we will begin to see more and more pensioners using products such as a lifetime mortgage to boost their retirement income as it becomes clear that their annuity will not be enough.
Customers may start taking an annual income from their property, or use equity release to delay annuitisation and maintain pension flexibility for as long as possible. It won't be long before equity release is an integral part of funding retirement. Not so much a product of last resort, but more a product of necessity.
Whether the increase in the number of advisers recommending equity release is a catalyst for market growth, or a result of market growth, is up for debate. What is evident is that more and more advisers are recognising the importance of equity release as a solution to their clients' retirement income needs and are acquiring the necessary qualifications.
We won't know, perhaps for years to come, exactly what the long term impact of the credit crunch will be. In the short term, customers tend to react by sitting tight and avoiding major financial decisions at all costs. However, when the dust settles and people come to terms with the fact that life has changed, this could have a positive impact on the equity release market. If nothing else, times of 'doom and gloom' remind people that money does not grow on trees and ultimately we are all responsible for ensuring we fund the lifestyle of our choice. Perhaps Alan Greenspan's comments were not so dramatic after all.
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