People often over-estimate their knowledge about retirement options yet lack confidence when making financial decisions. The shift from final salary to money purchase pensions and the freedom and choice reforms of 2015 have brought the issue to a head because of the extra responsibility on retirees to make rational and informed choices.
Equity release is arguably one of the most misunderstood financial products of all. This was highlighted in a recent Tisa report, which posed the question: can housing wealth save the day?
The report found two-thirds of consumers claimed to understand it but, when asked about the details, only managed to correctly answer three out of 13 true or false questions on average.
Chancellor Philip Hammond recently told the Treasury Select Committee property has an “extraordinary role” in the overall calculation of the wealth of UK households. But the wealth is not as easy to access or turn into income as savings or pensions. Although around a quarter of people expect to downsize in order to release some wealth, a shortage of suitable homes and high transaction and emotional costs can make this easier said than done.
Recent research we undertook into over 55s found a £408 gap between the monthly income people say they need and what they believe their current pensions and savings will provide. If they outlive their pensions, 40 per cent say they would live on the state pension despite the income being only just above the poverty line. Forty-five per cent say they would release equity from their home.
Easing out equity
Equity release is clearly assuming greater significance, with sales rising for the last six years and set to top £2bn in 2016: a quarter higher than 2015. Attitudes are changing. Today’s middle-aged are more comfortable with mortgage debt and more interested in maintaining their standard of living into retirement. They are also happier to help children during their lifetimes rather than leaving legacies.
That does not mean there are not obstacles holding the sector back. The obvious one is lack of consumer knowledge. The Tisa report found nearly one-third of people incorrectly believed taking an equity release loan meant giving up legal ownership of the home. More than one-third believed that if the loan exceeded the house value, the difference could be clawed back from the estate.
Efforts to boost financial education are important but I am not sure we can ever expect consumers to be experts in investment or retirement planning. The best we can do is put the guidance and advice structures in place so they are available when needed, and encourage take-up.
Providers are continuing to develop new equity release propositions and competition in the sector is intensifying. Advisers have a responsibility to include housing wealth within the overall retirement planning proposition.
We also need joined-up thinking from the Government and regulators. Housing wealth has a role to play in helping in a range of situations, from boosting retirement incomes to paying for care in later life, to helping those unable to repay interest-only mortgages. It has implications across departments, including work and pensions, health, local government and HM Treasury, as well as the FCA.
Consumer desire to access the huge sums tied up in bricks and mortar will drive growth in equity release. We see annual sales reaching £5bn in the next five years and perhaps £10bn in a decade. But this is money that can only be spent once, which means engaging consumers to ensure it is spent at the right time for them.
Paul Turner is managing director, UK lifetime mortgages, and group business development director at Just