‘Asset rich’ retired homeowners willing to look at merits of home equity withdrawal
The equity release market is only reaching a fraction of its potential and future growth is almost guaranteed as the number of people in retirement continues rising. Stephen Lowe, group external affairs and customer insight director at Just Retirement, looks at new research which suggests there is rapid growth in demand for equity release advice from pensioner homeowners looking for an income boost
The ‘baby boomers’ born after 1945 enjoyed increasing prosperity during their working lives but for many the future looks a lot tougher. Hundreds of thousands are sleepwalking into retirement each year without the pensions or savings to provide the income they need to sustain themselves and their families.
Yet this is the same generation during which home ownership rates rose and property prices leaped ahead. Many of these ‘income poor’ retirees are also sitting on significant property assets in the form of their own homes.
The idea of turning illiquid property assets into a stream of income through home equity withdrawal isn’t new. Older people often release cash by downsizing to smaller homes that are cheaper to run. Equity release plans have been available for many years with increasingly strong consumer safeguards.
Forcing care home residents to sell their homes to pay fees is also a form of equity withdrawal, albeit an unpopular one. In its latest white paper on long-term care the government proposed extending loans to pay for care that are later repaid from the house sale.
There are 10 million people aged over 65 with estimated housing equity of £750 billion. Finding intelligent ways to release some of this value has the potential to help a wide range of people from income-squeezed homeowners to inheritance planning for wealthier people.
We believe that home equity withdrawal options need to be on the checklist of all retirement planning. No one solution will suit everyone but it is important that people understand their options and make active choices.
Releasing money would also help fuel growth and job creation in the UK economy. The challenge is to identify and promote solutions that do the most good for the most people.
With policymakers switching on to the potential for the equity in people’s homes to be used to pay costs the state can no longer afford, in particular long-term care, it is important to understand consumer attitudes and behaviours. Our homes are not just one of our biggest financial assets, but emotional assets too. They provide comfort and memories as well as physical shelter.
To inform the debate, we commissioned the UK’s largest study into home equity withdrawal, seeking the views of a nationally representative sample of homeowners aged over 55, encompassing those approaching, at and in retirement. In total the research ran to more than 300 hours of face-to-face and telephone interviews with more than 1,000 individuals plus, in some cases, their adult children too.
A key message for financial advisers to take forward is that the market is only reaching a fraction of its potential; and future growth is almost guaranteed as the number of people in retirement continues rising. Around 8 per cent said they would be interested in equity release if they wanted or needed to raise money in retirement. That equates to 800,000 of today’s over 65s, compared to current annual equity release sales of just 17,000.
The report The Role of Housing Equity in Retirement Planning was recently unveiled to an audience of MPs, government officials, financial services professionals and third sector representatives. Our hope is that the information and evidence it contains and the proposals made will be used to help to cement the firm foundations on which tomorrow’s laws are built.
It also highlights some key findings of huge relevance to the financial services industry and to professional financial planners. The detailed research is available online at www.ERresearchcentre.org.
The starting point of the research was to seek to understand where people now stand financially and to make comparisons between the generations. There is no doubt that the general environment is difficult. People are living longer, although not necessarily spending more retirement years in good health.
On top of this are major social and economic trends that are making life tough including the general erosion in state benefits, the demise of final salary pension schemes, the fall in annuity rates, and a decade of poor investment returns that have depressed the values of many people’s pension pots.
Anticipated retirement income
The study reinforced the view that those approaching retirement (between one and five years away) are simply too optimistic about their likely incomes, anticipating £17,000 a year which contrasts with the £10,000 a year actual income reported by those at retirement and £14,000-£15,000 average of those now in retirement.
Only one third of those approaching retirement expect to be financially ‘comfortable’ in 10 years’ time, a far lower figure than those who had recently retired (48 per cent) and the established and long-term retired (40 per cent).
The face-to-face sessions reinforced evidence of a clear sense of disappointment and, in some cases, desperation, about the levels of income. Those taking part were generally shocked by the income a standard annuity would pay to someone with a typical pension pot of around £27,000, in one case prompting the mistaken assumption that a figure quoted must be the monthly rather than annual income available.
Having gone through the process more recently, the established retired (between one and 10 years in retirement) had a more realistic outlook but most still admitted having to budget very carefully in order to make ends meet.
The strategy of using equity release ‘drawdown’ plans – which allow smaller sums to be taken in tranches instead of an up-front lump sum – to supplement regular income received a favourable response once it was explained, but few people were aware it was available as an option, reinforcing the findings that consumer education and information is lacking.
Our view is that property wealth and equity release also has a huge part to play in planning for long-term care but that many consumers are looking to the government to give them the confidence they need to fully explore these options as part of wider financial planning in retirement.
The survey revealed that more than half think they will only be able to afford long-term care by selling their home. One in six said this had already happened to parents or close relatives. More than two-thirds said they would resent having to sell their own homes.
The resistance to selling the family home is more pronounced among those approaching retirement compared to those in retirement. The costs of care are seen as too high and there is a real sense of injustice that the financially prudent may have to pay while the feckless are looked after.
One of the factors often thought to be holding back the equity release market is attitudes towards inheritance but this issue is also showing some of the clearest differences between the older generation of retirees and those closer to retirement.
The established and long-term (more than 10 years) retired are more likely to believe in a duty to leave as much as possible to the next generation, even if it means going without during their retirements. This is a contrast to the views of those approaching retirement who are much less inclined to sacrifice their own living standards in order to leave money to their children.
This is not necessarily a selfish viewpoint, but a realistic and rational response to the fact that children may be more comfortably off than their parents. The children interviewed generally agreed, claiming it was more important their parents enjoyed a better life rather than leave an inheritance.
Interestingly, although the majority of parents had lived in their homes for some years – 80 per cent of the sample for 16 years or more – and many had brought up families there, very few specifically mentioned it was important to leave the house itself.
This strongly suggests that inheritance is perhaps not such a strong barrier as often perceived to the development of the equity release market. Nearly half agreed that they intend to enjoy their retirement and spend their own money, while six in 10 said they would not sacrifice their own lifestyle to gift money on death.
However, there was genuine interest from about half the respondents in equity release solutions that would allow some of the property value to be ‘ring-fenced’ to be passed on at death.
There was also more enthusiasm for ‘pre-inheritance’ and the idea of passing on money during one’s lifetime, to provide financial help to children when they need it, for example, as a deposit on a home. Only a small number were aware that this practice could help reduce inheritance tax later on.
The concept of home equity withdrawal in the form of downsizing is already under consideration by many retirees, not just to extract some of the value but also to cut the costs of living in a bigger house. While good in theory, in practice it seems less popular because people become aware that there are also downsides to downsizing.
People who have lived in their homes for many years often do not want to leave. They value being close to friends in a familiar neighbourhood and having the extra space of a family home.
Some had calculated that the value of a smaller house would not increase as much as their present home. Those in the study who had downsized admitted there was a high emotional and financial cost to selling up.
While people were generally aware of the pros and cons of downsizing, the idea of staying put and releasing value via an equity release plan had not been widely considered and was generally poorly understood. Nearly nine in 10 could not name a company that provides equity release products and 44 per cent said they did not know where to get advice on equity release products.
Knowledge of equity release
Only a quarter of people had heard of equity release and had a positive view. Just over a third said they have heard of the idea but knew nothing about it. This means that although a significant proportion of the population are wary, there are also large numbers who have a more open mind.
When asked whether they would be interested in equity release if they needed a large cash lump sum, 8 per cent said yes, while 7 per cent said they would be interested if they needed to increase their income. Of those interested in generating extra income, the average level was £288 a month.
Attitudes changed markedly when equity release was defined and explained in more detail, with more than a quarter saying they would consider it. Many of the concerns raised by individuals were those that have already been dealt with by Safe Home Income Plans (SHIP), the trade body recently superseded by the Equity Release Council that spent 20 years putting in place key consumer safeguards to improve products and boost confidence in the market.
When asked why people might use equity release, a host of reasons were suggested. Most common were because people might need extra income to get by in retirement, to enjoy your money while you can, to find extra money for holidays or home improvements. A few recognised the potential of pre-inheritance and of paying for care home costs. In general, where people had no children it was seen as a good method of having a higher standard of living.
At the same time people worried about a number of key factors, such as whether they could be forced out of their homes, whether they would have to pay rent and about the level of interest rates on equity release plans that some guessed might be as high as 20 per cent.
There was also concern about how any money taken out might be taxed. Among the established retired, respondents found it difficult to grasp the amount owed was repaid on death or when the house is sold, and that the repayment is guaranteed never to be more than the value of the home.
The most popular response to why people would not take out an equity release plan was ‘just not interested’. This suggests there is an instinctive resistance to equity release perhaps resulting from misunderstandings about how the plans work and perhaps the unfavourable stories they have heard in the past.
From the point of view of professional financial advisers, there are a host of positive points that emerge from the research that suggest a bright future for the equity release market.
It reinforces the evidence that the income squeeze on pensioners is very real and happening right here, right now. This is affecting the size of pension pots, the income they can buy, and returns on non-pension savings. At the same time, inflation is above target and the help from the state looks set to be curtailed in the years ahead.
A consequence of our ageing population is that increasing numbers are feeling that squeeze. This year, more Britons will reach retirement than ever before – a staggering 800,000 are expected to turn 65.
Home ownership rates are high and so far equity release take-up is low. In our research we found that of those retirees who owned properties valued at between £250,000 and £500,000, only 2 per cent had equity release plans, but 28 per cent had heard positive things about equity release and 32 per cent had heard of the concept but did not know the detail.
Today’s retirees also have a very different attitude towards debt. Growing numbers are still paying mortgages into retirement and, like many providers, we are already dealing with equity release customers facing trouble paying off interest-only mortgages. But in a more general sense, rather than seeing debt as a deadly sin, many of today’s retirees are used to using it as a tool to help them achieve better standards of living.
Strong consumer safeguards now apply to the equity release market, in terms of regulation and codes of practice. This area of financial services has more protection than any other with a ‘triple lock’ – it is mandatory for clients taking out equity release within the SHIP standards to go via a professional adviser, they must also use an independent solicitor and finally the plans are regulated by the Financial Services Authority.
This high level of protection is not well understood – the survey showed people felt the government had a role to play in promoting knowledge and confidence. The entry of more household name insurers as well as niche specialists are getting involved will help to raise awareness and boost competition.
Our view is that the equity release market currently only reaches a small proportion of those who could benefit and that equity withdrawal strategies should form part of all retirement planning discussions.
The proposals in this report call on the government and industry to work together to give people the knowledge and confidence to consider using these products as part of the solution to managing financial commitments later in life.
Given the importance of getting it right, we think there should be a government lead national requirement to engage and communicate with everyone as they reach age 50 to help explain the financial options they will have available to them as they approach retirement. Financial advice is crucial to this process, to help people understand more about the challenges they face and the solutions that could help.
This is something key figures in the equity release industry are passionate about. Speaking at the launch event of this report, Nigel Waterson, chairman of The Equity Release Council, said it was important that policymakers saw equity release as a solution, not a problem.
His point that it should form an integral part of retirement planning was echoed by Tim Loy, chief executive of Age Partnership. “People don’t know what their options are,” he said. “It needs to be on every advisers check list, even if it is not an option the customer proceeds with at that time, it must be explained and considered.”
Dean Mirfin, group director at Key Retirement Solutions, said the value tied up in a home was too big an asset for financial planners to ignore, particularly those offering an holistic advice service. “The equity withdrawal options have to be discussed whether that is downsizing or equity release,” he said. “Advisers may not need to specialise themselves, but they will need to ask the questions and form partnerships with those that do.”
Simon Little, managing director of Autumn Life Retirement Solutions, said lack of income is likely to be a major force encouraging people to consider equity release.
“They may lack financial resources in retirement in the conventional sense because they haven’t saved enough into a pension,” he said. “But in an unconventional sense, counting the home value, they do have enough. Just as people turn a pension into an income by buying an annuity, people will turn their home equity into income using some form of equity release.”
Hundreds of thousands of income-depressed baby boomers are pitching up at retirement needing advice on how to intelligently deploy their assets, including their homes, over the course of a long retirement. We must not allow people to struggle simply because they don’t know all the facts. Advisers are best placed to show people how to plan and make use of the most suitable options.