Pension shortfall will drive more people to equity release
The pension shortfall will drive more retirees towards equity release, say financial advisers.
A massive 98% of independent financial advisers believe equity release – releasing money from a property – will be crucial to the UK's ageing population, according to research by LV=.
Shortfall in pension provision, existing debts, home improvements and long-term care funding were the main reasons behind people releasing equity from their home.
The research also found that two-thirds of IFAs expect more equity release providers to re-enter the market over the next year. Prudential, Northern Rock and In Retirement Services are among those that dropped out of the market post-2008.
Vanessa Owen, head of equity release at LV=, comments: "For many people, their home is their greatest asset so it is understandable that more and more people will want, or need, to access the equity in their home."
Ros Altmann, director general of Saga, agrees that equity release is likely to become 'much more popular' as pension pots dwindle. "If people don't have the finances to support themselves, they will need other choices and if they have a house this would seem like the most suitable alternative," she says.
Gordon Morris, managing director of Age UK Enterprises, says the retirement industry must do more to help consumers meet funding costs in later life. "Providers must improve what is available and put the diverse and changing financial needs of those in later life at the heart of product development," he says.
Age UK, which recently launched an equity release product, recognises those in later life need more options available to them when it comes to releasing income in retirement. Morris adds: "As an industry now is the time to be focusing our efforts to deliver greater innovation and choice and help people financially prepare for later life."
James Sumpter, financial planning director of BestInvest, says equity release should only be considered as a last resort.
"If investors are retiring with smaller pensions or investment pots than required to maintain their lifestyles, then this is likely to fuel demand for equity release, given that many people in their 60s who entered the property ladder in the 1970s and 80s will have considerable equity in their homes. The best way to release value from your home is to downsize and reinvest the proceeds to produce an income," he says.
However, Andrea Rozario, director general of equity release trade body Ship, says although equity release is one option, consumers need to start thinking much earlier about retirement planning to prevent pension shortfalls.
She adds: "For those who have already reached retirement age, there are ways of boosting an insufficient pension – such as equity release or downsizing. However there is no substitute for planning early and therefore given yourself the most options possible."
What is equity release?
Equity release is a way of releasing money from your home, while still being able to live there. It is typically available to those aged between 55 and 70, meaning it's often used to enhance pension income.
There are two main types – the lifetime mortgage, or the home reversion plan. The former works like a standard mortgage, which rolls up and the interest is paid on death. A home reversion plan involves a company buying all or part of the property at between 20% and 60% of its market value, which it will then sell when the owner dies.
Equity release is usually a last resort, as one of the main criticism is that children are left little or no inheritance.
This article was written for Money Observer
An equity release scheme, where the money borrowed against equity in the property (up to a maximum of 50%) is subject to interest charges and although the borrower makes no payments during their lifetime, the monthly interest repayments will roll up and be added to the original debt, which will be settled on the borrower’s death. A lifetime mortgage is distinct from a home reversion scheme in that the lender never owns part of the property. But most lifetime mortgages are sold with a no negative equity guarantee. This means that if the loan is greater than the property’s value it’s a problem for the original lender and not the homeowner.
Home reversion plan
An equity release scheme whereby you sell part or all of your property to a home reversion provider, in exchange for a cash sum or income and you are guaranteed occupancy for life. On your death, the agreed proportion of the proceeds from the house sale reverts back to the provider and the rest is distributed to family. Although you don’t repay the loan until you die and have lifetime occupancy, the cash raised will not reflect the true value of the part of the property sold and you lose the right to any future growth in the part of the property you sold.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.