The freedom and flexibility that the government hopes will typify pension planning post-April is something we should all look forward to with a sense of excitement. This must not, of course, override the cautious approach we should enter into this unfamiliar world with.
However, despite the guarded approach, the new freedoms will have a far-reaching impact on a number of markets. The equity release sector has been progressing towards pre-financial crisis levels of lending over the past few years and finally broke new ground in 2014 – £1.4bn of released equity was a record-breaking figure.
Furthermore, today’s equity release market has evolved and modernised into a much more diverse sector and new lenders, better products and lower interest rates are accelerating the progress of the entire industry.
Pensions freedom kicks in on 6 April and we must prepare for vast changes across the market and further success. The Chancellor’s announcement that the government planned to put an end to the retired being virtually forced into purchasing an annuity was the real standout revision from last year’s Budget. Although at this point, the impact of the reforms on equity release remain unknown, the prevailing opinion throughout our industry is very positive.
Three quarters of advisers believe equity release will become more important to the lives of the over 55s and a massive 88% believe retirees will begin to see drawing on property wealth as normal following the reforms, according to a survey carried out by Stonehaven.
Most advisers believe that the predicted success of the equity release market is fundamentally linked to the freedom pensioners will have to spend their pension pots as they wish. With the cost of living rising and the average pension pot still hovering below a meagre £30,000, many retirees will simply not be able to afford to maintain their lifestyle.
However, equity release is perfectly placed to offer a solution to those who will struggle to afford retirement.
The Baby Boomers have benefited most from the growth in house prices and many may look to convert these historic gains into tangible tax-free cash to help fund their retirement. Retirees will also look to downsize to help pay for their retirement. But equity release has evolved into a range of flexible products that can provide the financial benefits of downsizing without the stress of having to move. The primary impact of the pension reforms will be forcing the retired to take a hard look at their finances and assets in order to cost their retirement.
The simple fact is that most people who are lucky enough to be homeowners see their home as their soundest, most profitable investment. Financial logic dictates that as most people have a pension pot that will not fund retirement on its own, turning to the wealth locked in the bricks and mortar of your home makes perfect sense.
The over-60s control more than £1trn of property wealth in the UK, but the average retiree cannot call upon a pension pot that will fund a lengthy retirement. For those who have a pension pot of about £30,000, the pot can be expected to run dry after little over ten years (based on £3,000 annual withdrawals and the remaining pot earning 3% per annum).
Factor in the lengthening life expectancy of the population (currently 81.5 years) and those who retire at 65 with an average pension pot will be struggling financially by age 75 – equally six years of financial hardship.
But as this demographic controls so much property wealth (the average over 60s homeowner owning a £270,000 property) and as the majority are mortgage-free (75%), the increasing significance of housing wealth should be expected in the years to come. Releasing equity via a lifetime mortgage will become an accepted form of retirement financing and the £1.4bn released in 2014 will soon be dwarfed.
Andrea Rozario is chief corporate officer at Bower Retirement Services