August 2008

A range of uses

Ten years ago equity release was an afterthought and for those already retired. The average age of a typical customer was 70 and there tended to be a particular trend which leads to this. Many retiring at this time had reasonable final salary pensions, they would typically retire at 65 and take their tax free cash. During the years that follow they would use the tax free cash to subsidise their lifestyle to an equivalent level compared to when they were working. This strategy though is of course fundamentally flawed for the majority. Flawed because the money runs out!

Over and over the story was the same, "our savings have dwindled and we want to replenish them". Lifestyle is a matter of choice and for those who have had a reasonable lifestyle throughout their working life it is something which they continue to value through their retirement years.

Typical customers

Over the past few years there has been a significant change in the trend for what makes a typical equity release customer. The first has been a drop in the average age to 68. This may not seem significant, however, it is the first time that we have seen a drop. This can be attributed to a number of factors. The first is that the retirement provision which many have is reducing. This trend comes as pension returns have been lower than expected, with many being forced to retire earlier either through ill health or redundancy. The second is that there is an increasing trend of higher divorce rates later in life which are fragmenting and in some cases decimating the finances of many. The third and more pressing is that the cost of living is increasing at rates way ahead of the levels of increase in many people's savings and retirement provision. The fourth is the fact that more and more providers are now making their plans available from age 55.

What we are gradually seeing is a growth in reliance, through necessity and through choice, on equity release as part of a retirement funding strategy. This contrasts to the historical trend of it being more the afterthought when already retired.

To help understand the trends it is worth understanding how the money is being used either pre or post retirement. The top five uses can give us an insight into this (see table). To avoid confusion the first thing to note is that the percentages add up to more than 100%. This is because many have more than one purpose for releasing equity. What is of great interest is that while the requirements are capital based some of the uses indirectly are generating additional income. This is through the repayment of debts and outstanding mortgages. According to the Consumer Credit Counselling Service (CCCS), for the first time, clients over 60 have the highest levels of debt and they are increasingly seeking help - now equal to the number of under 25s who go to them for help with their finances.

Insufficient pension provision

As equity release is featuring earlier in the retirement process there is an increasing need for it to feature more in the retirement planning strategy both for the customer and for those advising them.

There is an opinion shared by some that consumers should not rely on equity release as a retirement planning strategy. In isolation I would agree, however considering it as part of the overall strategy is neither avoidable for many nor practical.

If we accept that equity release is, or can be, part of a retirement provision strategy then we can become wiser to how it can be used outside of the obvious. The other barrier is changing the view that equity release is a post retirement solution.

The final point to make is that there is no-one for whom equity release may not be a viable proposition. Remember even those who we would class as high net worth have a lifestyle that they want to maintain. Those who are now embracing equity release as part of the retirement planning solution are making considerable ground. It's not for every customer, but you may be surprised by those who see it as an ideal solution.

Dean Mirfin
Business Development Director
Key Retirement Solutions