It is a simple fact that people in the UK are living longer. They are now retired for longer than ever before and there are not enough younger people to take on the financial strain of supporting such a big retired population.
In addition, the Government is being stretched to breaking point as it struggles to pay pensions for longer as well as benefits and long-term care costs. So, what is the answer?
Let’s examine the question in more depth. The UK is an ageing population. Life expectancy is currently 82.4 years for men and 85 years for women, so a healthy retiree can expect to enjoy a retirement of 20 or 30 years – a different picture from life expectancies in the 1970s and 1980s.
In addition, according to the Office of National Statistics, in 2007, the UK was made up of more over-65s than under-16s, which is a trend – even with the recession baby boom – that looks likely to continue.
It is expected that within 20 years, half of the adult UK population will be aged over 50 – a terrifying thought for our shrinking working generation.
At the moment, the maximum state pension that a single person can receive is £97.65 a week, which equates to an annual income of just £5,078. This is well below the minimum wage, so if people want to maintain the standard of living they enjoyed while working, they must start saving early. However, this is clearly not a viable option for those people at or nearing retirement age.
These people are the youngest of the 17 million baby boomers and have benefited from a sustained period of very high house price inflation, free further education and a largely robust economy.
Indeed, recent research conducted by Aviva reveals that the average value of homes among the over-55s is £236,654 which is almost 30 per cent higher than the UK-wide average. Further, the average equity in their properties is £225,224. This represents an untapped resource that retirees can use to improve the standard of living in retirement.
While the baby boomers are enjoying these factors, those on the other end of the scale are not so lucky.
According to the National Housing Federation, the average age of the first-time buyer has shot up to 37 as people struggle to climb onto the housing ladder while at the same time paying off debts, starting a family and all those other important financial obligations.
This inequality between a retired population that has so much wealth tied up in their homes compared with a working population that can’t even buy their first home means that to further tax our working generation to bolster the finances of the over-50s is simply not a practical option.
So the biggest asset of people of this generation – their home – must surely come into the equation. However, before we get on to that we need to take into account that it is not only increased longevity that this generation needs to finance but ill health as well.
While we are living longer, older people do tend to have more health problems than younger people and funding for these treatments needs to be found.
Rozario: ’It is expected that within 20 years, half of the adult UK population will be aged over 50 – a terrifying thought for our shrinking working generation’
The NHS (and the Government) bears the brunt of these costs but they do have some provisos. Currently, the Government provides free long-term care to people whose estate is worth less than £23,500.
However, for many people, this is not an offer they wish to take the Government up on and they would prefer to find financing which allows them to stay in their own home or at least choose their own sheltered accommodation.
So, we have a rapidly ageing population with significant housing wealth who needs financial assistance but whom we need to take responsibility for certain aspects of their retirement funding.
Of course, a new Government and the recent opening of a new Parliament may bring about radical policy changes that plan for a more stable and secure future. With cuts across the board, the worry is that our older generation will be sidelined once again. Indeed, while the coalition Government has obviously put some thought into retirement funding, getting the economy back onto a stable footing is likely to take precedence over this ambition.
So what is the answer? Well, to complicate the matter, there is not one single answer. The retired are not one homogenous group and thus the answer to the problem has many facets.
There is a wide range of needs among our older generation and advisers need to remember that equity release can serve numerous uses, including paying off existing mortgages or even helping their younger family get onto the housing ladder. Added to this, equity release is a rapidly developing market and one that is going to change dramatically over the next five years.
We must also take account of the needs of emerging customers. Equity-release products will evolve to meet these needs, they will become mainstream and maybe even the product names, will start to describe the choices and the vastly different customer base that are likely to turn to equity release.
So, while we have a long-evity crisis on our hands, equity release may provide a workable solution for some of the equity-rich but cash-poor retirees.