Housing wealth to fill gap left by pension income

Housing wealth to fill gap left by pension income

A new report from the Equity Release Council has said that wealth accumulated by UK homeowners through mortgage repayments has rocketed in the past decade to a record £62.7 billion in 2016, paving the way for housing wealth to play a vital role in funding later life as a pension income crisis looms.

The report takes stock of the changing role of housing wealth in the post-‘pension freedoms’ retirement landscape, assessing the progress made by the equity release sector and the challenges ahead in meeting consumer demand.

It shows that wealth accumulated by homeowners via regular and lump sum repayments of mortgage capital has increased from £40.7 billion a year in 2005 to £62.7 billion in 2016: the highest figure since records began in 1999. This far exceeds personal pension savings outside the workplace and compares to estimated total contributions to UK private pensions of £70 billion in 2012 (the latest year where data is available).

At the same time, the equity tied up in people’s home has never been greater. Total homeowner equity in England alone reached £2.6 trillion last year, with 69% (£1.8 trillion) belonging to households aged 55+. Based on demographic projections and modest house price growth, this age group’s housing wealth is forecast to nearly double to £3.6 trillion in the next 20 years (2036).

These trends come as millions of workers face severe reductions in income when they retire, owing to the shift from defined benefit (DB) to defined contribution (DC) pension schemes. The report illustrates that a DC pensioner with contributions of 8% throughout their working life – soon to be the minimum required under auto-enrolment – can expect to retire with a pension that provides only 15% of their final salary. This is just a fifth of the pension an identical worker in a DB scheme would enjoy.

Against this backdrop of reduced income in retirement, coupled with demographic challenges including an ageing population and rising social care needs, housing wealth has the potential to play a vital role in helping more people to meet a range of financial needs in later life. The report highlights that the average worker potentially accumulates twice as much wealth via mortgage capital repayments each year than they contribute to their pension (£4,480 vs. £2,240). Housing is also a more commonly held asset with 17.7m owner-occupiers compared with 10.3m employees with a pension.

Equity release has just seen record annual growth in new customers and total lending in Q1 2017. This has also come at a time when the later life landscape has been shaken up by socio-economic changes and regulatory reforms such as the 2014 Mortgage Market Review (MMR) and 2015 pension freedoms.

As the market continues to evolve, the report outlines a number of key areas of focus. Firstly, while the pension freedoms provide new choice and opportunity for retirees, there is a need to enhance the understanding of later life finance options among advisers and consumers. The creation of a new, single body for public finance guidance has the potential to provide a more joined-up approach across the equity release sector and other key players in the market.

Secondly, while technology can improve communication methods with consumers, the report suggests that the market must be mindful that online and interactive tools are not always appropriate or desirable, and must be used alongside traditional methods to ensure information is accessible to all. It also suggests that greater emphasis on the role of ‘soft skills’ training in supporting a positive customer relationship, in which the customer can ask questions and take the time to reflect on information before making decisions, may help to support good consumer outcomes.

Thirdly, for more people to benefit from equity release, it proposes that government and industry can work together to help normalise equity release as a socially acceptable vehicle for retirement finance, by tackling the lingering stigma attached to debt in later life.

Fourthly, the report highlights how continuing product developments in the equity release industry can help unlock the potential for wider uptake among an increasingly diverse consumer population, with ‘future proofing’ enhanced by new product features alongside financial and legal advice and product safeguards.

It also urges the next government to abandon the ‘semi-detached’ attitude towards equity release that has been held by previous governments. In calling for government to go further in supporting industry growth, The Council calls for government to establish a dedicated policy team committed to promoting equity release as a safe product that should be on all homeowners’ retirement planning checklist as they approach later life.

Nigel Waterson, chairman of the Equity Release Council, said: “A major consequence of reforms to the retirement landscape is that pensions are now fully realisable and inheritable assets, just as other financial assets and property are. This makes it possible for retirees to plan their finances by considering all their assets, including their home. For many homeowners, the logical conclusion of a more structured approach to retirement planning will be outcomes that include the release of housing wealth to meet a range of financial needs.

“Increasing product innovation, competition and flexibility has seen the equity release sector ‘rebooted’ with great potential to build on current growth. As this report sets out, there are important roles for industry, government and regulators to play in the next stage of the market’s evolution, so that the UK’s ageing population can take advantage of their considerable property assets to enjoy a more financially comfortable retirement.”