Most UK residents reaching retirement in the 21st Century would seem to be facing a bright future – a longer and more active life brought about by decades of medical advances and increased property wealth as a result of increased homeownership and big rises in house values since the 1970s.
Increased longevity is great news but the inflation-proofed pension is becoming a thing of the past for most retirees and these extra years may have to be lived on a worryingly low or declining income.
Medical advances mean more active years but for some may bring more years of partial or even total incapacitation, with no financial provision for care.
The Government Actuary’s Department estimates that by 2041, half of adults will be over 50. Many will fail to make adequate financial provision for their later years and some may find the performance of their investments is disappointing.
The lack of forward planning or deficient return on investments was not always such a problem, as the answer lay in the state pension topped up by private contributions.
The current generation of 50-plus adults will be on target for a pension worth 66 per cent of their final salary on top of the basic state pension of £84.
It is unlikely that future generations will be able to enjoy a pension based on their salaries.
The new national pension savings scheme is likely to provide just 20 per cent of their final salary unless they make much higher contributions than their parents ever did.
They will have to work longer and will end up with a significantly smaller pension unless they invest heavily in their retirement.
One potential answer lies in people’s own bricks and mortar. Equity-release arrangements, now an integral part of mainstream financial planning, include schemes approved by Safe Home Income Plans such as lifetime mortgages. They are designed to release money to people whose wealth is tied up in their home but who want to maintain control over their assets and do not want to sell their property or make monthly repayments.
Ship was set up in 1991 by a small group of providers of equity-release products. The objective was to protect customers of home-income and equity-release providers, as members must keep to the provisions of the Ship code of practice.
With a Ship product, there is a guarantee that you cannot be put out of your house unless you fail to insure it or let its condition deteriorate. Most important, all Ship plans carry a guarantee of no negative equity, so clients will never owe more than the value of their home.
Many equity-release products come with the Ship guarantee, with most being lifetime mortgages. A lifetime mortgage involves a homeowner taking out a loan, with interest added to the total outstanding mortgage instead of monthly repayments being levied. The owner is granted a right to occupy the house until death or going into care, when the money is repaid from the sale of the house.
Confidence in this market should continue to increase, particularly in light of the FSA’s involvement. There used to be a misconception that vulnerable pensioners were being talked into taking out these products without realising what they were doing.
However, most people who enquire about this option have researched it thoroughly and are often more clued up than firsttime buyers when it comes to knowing what they want. They often have the time and leisure to look into the market and consider all the options before making a decision.
The worries about elderly people spending their children’s inheritance are also largely unfounded. Many young people today are earning more money than their parents and are encouraging their parents to go for equity release to ensure they have a happy and financially secure retirement.
Despite these reassurances that equity release is now considered a safe and secure option, many pensioners remain asset-rich and cashpoor.
Recent research by Key Retirement Solutions, an independent advice firm which specialises in equity release, shows the potential market is huge, with pensioners seeing average property value increases of 12.5 per cent in the last year.
Pensioners could tap into this wealth by using equity-release plans to boost their income. It is not a straightforward commodity product or quick-fix solution but as long as advice from an independent specialist adviser has been sought, there is no reason why many senior citizens should not benefit from the pool of money they have accumulated, without having to sell their home.