The Equity Release Council has produced its 2018 Spring review and, it’s fair to say, the growth in equity release in recent years has been truly amazing. Let’s look at some highlights from the second half of 2017:
- 20,232 first-time borrowers, up 20% over the first six months of 2017.
- 13,209 returning drawdown customers, up 5% over the first six months of 2017, with 2,099 further advances up 19% over the previous six months.
- The average ages of borrowers in 2017 were 68.6 for lump-sum plans and 71.7 for drawdown. The vast majority were aged between 65-74.
Although the amount borrowed was up 42% to £3.06bn I am more interested in the numbers using housing wealth in retirement than this figure. Over 67,000 householders used equity release to obtain access to some of their housing wealth during their retirement, but how many other retirees used downsizing to obtain such access? Less, the same, or more than used equity release?
The best estimates I have managed to access are that there are 8.25 million homeowners over the age of 65 and it is estimated that 7% of them move house each year. This intimates that 58,000 pensioners downsize each year. Are as many, if not more, therefore using equity release as are downsizing in retirement? It’s a tricky number to get to, as there could be duplication in the above. Some, for instance, will have used a lifetime mortgage to move to a more expensive home, which could also be classed as ‘downsizing’ in retirement.
The FCA recently published its latest data bulletin on how pension freedoms are being used in practice. It provides many insights mainly because it includes relevant information from its Financial Lives Survey.
This data shows that 23% of those aged 55 and above who have not retired have no private pension. That means 77% do. Many who hold defined benefit pensions (34%), and want that pension to provide a lifetime income, are unlikely to seek advice on their pensions. The 54% who hold defined contribution pensions, (there is a crossover of 12% who hold both) are the ones that will theoretically require pension advice. This equates to roughly 350,000 individuals a year.
Of that 200,000, 26% have no idea of what their defined contribution pensions are worth. Assuming these to be towards the bottom end of pension pot sizes, only 32% (112,000 each year) have pension pots in excess of £50,000 with 22% (77,000 each year) having over £100,000. The remainder are unlikely to pay for advice or be attractive clients to some pension advisers which could be around 250,000 retiring individuals each year.
The data for April to September 2017 shows 44% (130,972) of transactions relating to accessing pension freedoms were classified as advised. Remember some individuals will have more than one defined contribution pension and could therefore show up in the data more than once. Within this number, 68% of those that went into drawdown were advised, whereas the numbers were around 30% for other options.
The Financial Lives Survey asked what respondents felt about the statement ‘My pension income alone is not sufficient for me to live on’. This was asked of those who have started to draw on their pensions. In the age group 55-64, 67% agreed. Over the age of 65, 41% agreed. Add in those who have no private pensions and over 50% of retirees maintain that they have insufficient retirement pension income.
Roughly 75% of pensioners own their own home. The 25% who don’t do not necessarily have little or no pension income. This means that more than 50% of the 50% with inadequate pension income could also be looking at how they will use their housing wealth to fund their retirement. With 700,000 people retiring each year, that means at least 175,000 require advice and guidance as to how their housing wealth can be used alongside their pension wealth to provide them with a pension income that is sufficient for them to live on.
Another point to make is that I estimate, at most, 125,000 accessed their housing wealth in 2017. This is far short of the potential of 175,000 who the data indicate will have inadequate pension income in retirement, a growth of 40%. Also others are accessing their housing wealth for inheritance purposes or care funding rather than to meet retirement income needs.
Two things come from this analysis. Firstly, where do individuals go for guidance on a retirement income strategy that takes account of both pension and housing wealth? There are a number of strategies that could be followed including:
- Use part of the pension savings, then funds from a house downsize, followed by the remainder of pension savings.
- Exhaust pension, then use equity release.
- Use pension throughout life with equity release being used to top up savings from time to time.
Other strategies are available, as they say; these will depend upon the client’s circumstances.
Secondly, if there is potential for more than 40% growth in the number of transactions each year are there sufficiently qualified advisers to meet that increased demand? The above indicates to me that retirement income planning as an industry is still, very much, in its infancy.
Bob Champion is chairman of the Later Life Academy (LLA)