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A consumer&#39s view

Exhorting homeowners not to rely too much on property to provide financial security in retirement is a bit like spitting in the wind.

With shares still 40 per cent below their all-time high of December 1999 and bonds likely to fall as soon as interest rates tick up, what is there left for savers to rely on? Who wants a conventional pension policy?

House prices have almost doubled in the last five years. The average house price has gone up from £73,286 at the end of 1998 to £133,908 at the end of August 2003. Homeowners are feeling rich and this has been reflected in retail credit and spending figures.

Recent research from Pru reveals that 40 per cent of people are planning to rely on bricks and mortar to provide them with an income in retirement.

This is likely to fuel huge growth in the equity-release market over the next 30 years, with people using these schemes to free up some of the capital in their homes, says Pru.

People aged 25-34 are the main band of people looking at their retirement income in a new light, according to Pru&#39s research. Of this age group, 55 per cent said they would look to their investment in property to provide them with an income in retirement compared with 47 per cent of people aged 35-44 and 40 per cent of those aged 45-54.

Those already retired are showing the way. Equity-release lending more than doubled in the first half of the year compared with 2002. Figures from the Council of Mortgage Lenders show that £498m was borrowed by older homeowners in equity-release mortgages – more than double the total of £225m recorded in the first half of 2002.

According to CML figures, about 11,700 equity-release loan were taken out at an average value of £43,000.

Equity release in terms of the general mortgage market is still tiny, accounting for less than 0.5 per cent of the total residential mortgage market. However, the CML believes this type of lending will rise dramatically, with industry estimates suggesting a potential market size of £50bn-£100bn. This is good news for IFAs specialising in this market. If you cannot sell pension products, there is clearly a market for equity release.

Are these savers who are relying on property – from the rising equity in their own homes, buy to let, holiday homes in the UK and abroad, commercial property held in a Sipp to equity release – making a big mistake?

The Pru is cautioning that investors should have a balanced portfolio which includes property, cash, equities and bonds. But it is difficult to impress this on an investing public which has lost as much as 40 per cent of its savings in equities over the past three years while having seen house prices double in five years. That is not to say Pru is wrong. The main dangers of relying on property to fund retirement are a big setback in property prices at some stage or a collapse in the rental market.

But there are other influences at work in the equityrelease market. If house prices continue to rise, even at a more modest rate than in the past, soon, even the average homeowner will have to take into account the effects of inheritance tax on the home they own.

Equity release is seen by many – even those with sufficient income in retirement – as a means of passing money on to the next generation while at the same time reducing their IHT liability. By remortgaging, they can help their children or grandchildren to get a foothold on the homeowning ladder, hence the massive increase in the size of deposits being put down by first-time buyers.

All this is good news for those who make their living out of the property market. The equity-release market – like the buy-to-let mortgage market – will see fiercer competition and new and more attractive products will be called for by consumers. There is a big opportunity for those clever enough to take advantage of the opportunity.

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