As an actuary, I’m trained to use evidence-based scientific methods to anticipate the range of possible outcomes and to estimate probabilities of different possibilities. So what does the evidence tell us about the equity release market?
Despite the equity release market returning to growth, we haven’t seen the phenomenal increases predicted (and hoped for) by many pundits and other commentators – including myself.
That said, this year has started with some positive news with £233.8m released in the first quarter which is 17% higher than the same time last year and the strongest start to the year recorded since 2009. However, this is still nowhere near what some might expect its potential to be, given the current market forces, difficult economic times and consumer lifestyle expectations. So, what is happening now and what is likely to drive growth in the future?
The 2011 Census revealed that nearly 10 million people were over the age of 65, which is a significant percentage when the population in the UK is 63 million people. Not only is a large proportion of our population older, but people are living longer. According to a UN Population Study in 2010, life expectancy at birth for the average person is 67.88 years, but in the UK, this shoots up to 79.53 years and is steadily climbing. Indeed, the Office for National Statistics (ONS) suggests that 35% of the 826,000 babies born in 2012 could be alive in 2112.
While this is good news and shows the effect of improvements in health and welfare, the government has been left with a difficult problem. In 1909, the basic state pension was introduced with a qualifying age of 70, a means test and the necessity that the recipient needed to be of ‘good character’. In addition, just 24% of the population survived to 70 to get a pension.
The picture is very different today with 84% surviving to pension age and living, on average, for a third of their lives in retirement. However, while more people spend longer ‘economically inactive’ they are not necessarily healthier over this period and it is estimated that over 50% of people have lifestyle or health conditions which qualify them for an enhanced annuity at retirement.
To combat these issues, the government has already started the process of deferring the state pension to reflect longevity and is encouraging greater savings from a younger age with auto-enrolment. But, what are the options for over-55s who have either retired or are approaching retirement and who no longer have a lifetime to accumulate wealth for their ever-longer retirements?
Well, some will benefit from final salary pensions, others will reap the rewards of a lifetime of careful financial management and many will look to extend their working lives. However, this is not an option for everyone and an increasing number will look to use their property to pay for retirement and increasingly the costs of any long term care needs.
Downsizing offers the most simplistic answer, but many people do not have the fully paid up ‘empty nest’ they had hoped for nor the inclination to move. So what is the answer?
Increasingly equity release and enhanced equity release (where medical and lifestyle conditions are taken into account to offer individual underwriting) can offer people access to this asset. The use of specialist ‘enhanced’ underwriting is relatively new in this market but it can enable customers to get significantly more from their property and I do expect it to become standard practice in the future.
With all these drivers for growth, the question remains why is this market not bigger? The answer to that question appears to be perception and access. The perceived legacy of scandals of the 1980s is still affecting the market and withdrawal of high street lenders since 2010 means consumers are less likely to come across equity release on a day to day basis. So how can we address this problem?
Perceptions will be improved by greater awareness of not only the stringent rules offered by the Equity Release Council and the regulations from the FCA and PRA but also greater understanding of the personalisation offered by individual underwriting and enhanced equity release. The second is exposure, and brokers can play a huge role by championing equity release and helping the public recognise it as a financial product that is an excellent fit to many people’s circumstances.
Gavin Howard is director of equity release at Partnership