For many people approaching retirement, the value of their home will be close to or will exceed the value of their pensions. This is perhaps not surprising in a country where enthusiasm for property investment starts early in life while pension planning gets left until later.
The wealth tied up in UK residential property is estimated to be at least £4trn, around double the value of assets held in pension funds. Eight million, mainly older, people are thought to own their own homes outright. And the over-65s have about £750bn equity tied up in their homes.
Advising on tax efficient ways to pass on this wealth to the next generation has been an important part of the financial planner’s role for many years. That is set to continue but at the same time there is a growing opportunity for planners to help those in retirement access some of that wealth as a result of the ageing population and the squeeze on pensions incomes.
Baby boomers are reaching retirement in growing numbers – a record 800,000 celebrated their 65th birthday this year. They can look forward to longer retirements than ever before, yet many will struggle for income in retirement. Fewer people are retiring with generous final salary pensions, standard annuity rates are near record lows and a cash-strapped government is reining back on benefits.
To gain a better understanding of consumer attitudes towards equity release, we commissioned the UKs largest research study among older homeowners.
This research shows that one-third have no private pension provision and rely on the state pension. Fewer than one-third (32 per cent) of those approaching retirement expect to be financially comfortable in 10 years time.
While people nearing retirement expect an average income of around £17,000 a year, those now reaching retirement reported incomes of closer to £10,000 a year.
The research also clearly showed that the traditional desire to pass on a home as an inheritance is being replaced by a more pragmatic view.
Only 17 per cent of those approaching retirement agreed they would sacrifice their own lifestyle in retirement to leave some money to family, compared to 27 per cent overall. And where there is spare cash, 55 per cent said they would rather pass it on while they are still alive to see it put to good use.
With so much wealth tied up in the home, it is important that it is seen as an asset along with pensions and investments and is put at the heart of a truly holistic financial planning proposition. It is important for planners to understand how the home fits into the client’s thinking and be able to explore all options whether the goal is to help provide an income, deliver a lump sum, plan for care costs or leave an inheritance.
The obvious way to release some of the wealth tied up in our homes is by selling up and moving to a smaller property.
Half of homeowners approaching retirement stated they would rather downsize than use equity release.
But when asked in-depth questions, the downsides of downsizing became clear. People have a huge emotional attachment to their homes and neighbourhoods – more than half had lived in their homes for more than 25 years.
Financially, people were aware of the high costs of moving and the fact that the value of a smaller home would not increase as quickly. Practically, they worried about having to offload treasured possessions and the problem of finding somewhere suitable in a difficult property market.
While older homeowners recognise the pros and cons of downsizing, equity release remains poorly understood. However, they were receptive and interested in how the plans work and the safeguards in place. Tighter regulation and the participation of major, trusted brands are helping to increase consumer confidence and deliver competition and innovation.
But advisers who want to benefit need to be involved in broadcasting that message too, particularly to those approaching retirement who, our research shows, are most likely to seek professional help. Overall, advisers would be the preferred source of equity release information in 19 per cent of cases, but for those set to retire in the next year this figure more than doubled to 39 per cent, and for those one to two years out it was 36 per cent.
Yet a recent insurance company poll of advisers found that, while nearly nine in 10 said equity release was important to their clients, fewer than one in four were able to provide that advice because of factors such as lacking the right qualifications or not having referral deals in place.
Retirement planning is about more than just pensions and buying pension income. It is about making choices, ideally from a decade or more before retirement, that incorporate the full range of assets and options. Consumers are increasingly willing to use the wealth tied up in their homes to enrich their retirements – financial planners must be equally willing to help.
Steve Lowe is group director of external affairs and customer insight at Just Retirement