Bob Champion: Through the looking glass

After one financial services professional took to social media to attack daytime TV equity release adverts Bob Champion uses his latest column to make the case for the product, which he says could be some retirees' only viable option

Recently on social media, a financial services professional commented on the number of equity release advertisements they’d seen on daytime television.

In their view, the use of equity release should be the solution of last resort and such advertisements were a bad thing.

I then looked at their profile and wondered whether they truly understood retirement.

We live in interesting times. There is an interesting conflict between a government supposedly fighting a ‘Nanny knows best’ culture and laying down laws and rules that we are expected to follow.

We each can probably name several types of advertising that we feel should be banned for the greater good. Some of our opinions will be well-informed, others will be a combination of personal prejudice and bias.

That social media comment made me try to understand how the commentator came to their conclusions. They were young, so immediately my personal bias kicked in. Had they been influenced by the poor equity release products sold over 30 years ago? More importantly at that young age did they understand retirement?

Retirement is not work. When we work, we are a utility. We generate income from employment. From that we spend on our essentials, we make discretionary purchases to enjoy life, and hopefully have some left to put aside for the future. The leftover amounts that are put aside add to our wealth.

When we retire, the only regular income that all have is the state pension. This does not become payable until state pension age. Some have income from annuities and others defined benefit pensions. Very few are able to meet all their essential spending from the state pension alone. Also, if retirement occurs before state pension age that income will, for a period, not be available.

Ignoring any state benefits that may be available, they need to draw down on their wealth to finance their retirement. For those with large pensions and other wealth e.g. stocks and shares, this is probably not an issue.

We are constantly being told by pension commentators that people are not saving enough for their retirement. A two-person household may need an annual income of £30,000 for an adequate retirement. That is just £15,000 each, when average earnings are in excess of £25,000 per annum.

After allowing for two state pensions there is still a shortfall of £12,000 a year. This could need in excess of £300,000 to fund. How much does the average person have in savings to retire with? In 2018 the average pension pot was £50,000. We can add defined benefit pensions, ISAs and other savings to that.

It is highly unlikely that our average couple will have £300,000 between them. They would probably be lucky to have £200,000. So how can they make up the shortfall?

Close to 70% of retirees own their home. This along with pensions, on average, are the biggest components of retired household wealth. So how can they extract £100,000 from their home?

The obvious answer is to sell up and buy something cheaper. Average house prices are around £230,000 with vast regional variations. Moving house involves a large amount of transactional charges and other costs – to clear £100,000 after those charges could mean someone in an average-priced home looking to move to a home valued at just over £100,000. Ignoring the emotional aspect of moving home, for many this would be a non-starter.

Different options

The alternative is to stay in their current home and extract some of the equity. This can be done through a mortgage. If interest has to be paid on the mortgage, the essential spending of the household has to increase to include those mortgage payments, needing yet more income.

Going back to our average household. They retire, they draw £12,000 a year from their retirement savings, £4,000 more than their retirement savings can be expected to sustain. How long will it be before they realise, they cannot continue to live like this without significantly reducing their spending, or calling on their housing wealth?

Going back to the social comment. If people had put sufficient money aside to fund their retirement, the need for equity release products would be reduced. The vast majority haven’t.

Therefore, housing wealth has to be part of their retirement equation. For many equity releasee will be the most practicable way to augment those insufficient retirement savings. The television advertisement is only the start of an advice process.

I hope the social media commentator is saving enough for his retirement to avoid having to respond to one of those equity release advertisements when they retire. I suspect that a large number in a similar position are not, and therefore having the option of an equity release product in retirement is clearly a good thing.

Bob Champion is chairman of the Air Later Life Academy