Steve Lowe takes a look at potential drivers for growth in the equity release market
With many pensioners struggling with the cost of living and the state no longer able to afford to pay the costs of elderly care, it is impossible to ignore the billions tied up in property owned by those in retirement.
We saw this in Andrew Dilnot's recent report on care funding, which suggested that alongside product innovation in the pension and insurance markets, people in later life may look to equity release and new mortgage-based solutions to meet their income needs.
Tapping into property wealth is a sensitive subject, as much an emotional as a financial decision. This is probably one reason the equity release market has been on a slow burn.
Borrowing restrictions, falling house prices and poor consumer sentiment through the credit crunch saw many equity release providers quitting the arena.
Product development has played its part too, with more emphasis on plans that allow gradual drawdown rather than paying out big slugs of cash up front.
Last year, the market was worth more than £800m (about a tenth of 1%) of the overall housing wealth owned by over-65s of about £750bn.
From such a low level, you could argue not much has to change for the equity release market to start posting strong growth.
The number of retirees is rising and they are living longer. Pension returns have fallen and living costs have spiralled. The result is a spate of new equity release providers and re-entrants to the market.
This is a trend that will benefit financial advisers able to guide clients through the many complexities. These will include strategies for using a combination of pension, savings and housing assets to generate income needed during different phases of retirement.
There is also the interaction with the benefits and tax systems. And of course, product innovation - we are already seeing equity release plans which are underwritten on health grounds and plans designed to lock in some value for beneficiaries.
This is a sector that already has a great deal to offer in terms of products, competition and respected providers. The solutions are not suitable for every retiree, but they are useful tools for an adviser to be able to call when appropriate.
Where things could change
In addition to the demographics, we see at least three big drivers for the market.
The first will be the eventual proposals that result from the Dilnot Report. Capping an individual's liability for their own care costs at £35,000 a year has been suggested. It is an important psychological underpin because it gives certainty. But it is really just a starting point.
This figure excludes living costs and does not take account of people prepared to pay more for a service that exceeds minimum levels or is domiciliary (at home) rather than a care home resident.
The result is likely to be equity release not just to directly fund care, but to buy insurance products that pay out to cover a range of eventualities in later life.
The second driver is likely to be the changing attitude of affluent retirees towards their housing wealth. It could be that they just want to enjoy some spending power while they still can - holidays, extensions, cars, and so on.
We are now seeing equity release being incorporated into holistic financial planning with strategies designed to pass on wealth to future generations in a tax-efficient manner. Property is often a problem that needs to be factored into financial planning because of its high value and relative illiquidity.
Finally, attitudes have started to change. Not so long ago, people avoided debt and scrimped to leave a small inheritance. Today, using debt wisely is part of life and we expect higher living standards.
In addition, the children of these retirees do not want to see parents struggling in later life. Where children are involved in the decision and understand how the mechanism works, there is good support for equity release.
Dilnot is keen to see the financial services industry and financial advisers working more closely with local authorities, voluntary organisations and charities.
The equity release market will certainly take a big leap forward at the point where the big consumer brands get involved in promotion and distribution. That point may not be too far off.
Steve Lowe is director of external affairs at Just Retirement
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