The phrase ‘second line of defence’ has been used a lot lately, particularly in relation to the Pensions Scheme Bill, with Labour peers in the House of Lords attempting to introduce extra regulatory protection for consumers regarding the decisions they will make when the new pension freedoms are introduced in April.
Much has been made about the pension changes and the fact newly-retired individuals will now have greater flexibility and choice when it comes to accessing their retirement income, but of course there are some concerns that come with such a sea-change. For instance, what happens to those who, for want of a better phrase, rip through their pension savings in double-quick time, and are left with nothing to support them later into retirement.
We are all acutely aware that taking the compulsory purchase of an annuity out of the equation means that retirees, should they wish to, can access their money and use it entirely to buy a Lamborghini or take a trip to the casino and place it all on red. It might be highly unlikely but it’s not beyond the realms of possibility.
Even if this won’t be the intention of the vast majority, according to research conducted last year by Hargreaves Lansdown, 200,000 retirees plan to cash in their entire pension pots from April. Popular ways to spend that money include holidays, paying debts, DIY, buy-to-let property, gifting cash to children and grandchildren, the list goes on. Within certain quarters there is a real fear of pensioners going overboard with their newly-secured freedom and soon finding themselves running out of money.
While one hopes a responsible retiree will not wish to go down this route, we certainly believe that in this new environment, equity release is going to have an increasingly important role. While the retired are likely to use these pension freedoms to fund their lifestyles initially, with the average pension pot not being more than £25k and the length of people’s retirements getting longer, it’s quite possible that other sources of retirement income will be required at some point.
Homeowners who find themselves in this position will at least have a number of options to explore, namely downsizing or releasing equity from their home. We have already seen a growth in equity release lending last year before the changes are even introduced however it seems highly likely that April will see the equity release sector facing increasing demand for its products.
The important point in all of this is of course retirees’ access to professional and specialist retirement/later life/equity release advice and how this dovetails with the Government’s own Guidance service. For a start, how many individuals will take up the guidance? Establishing a ‘second line of defence’ has been the focus here because, again in this newly flexible era, individuals can choose not to take the guidance, can opt to be inert and simply take up their current providers’ retirement income product, or place their money with unregulated entities which might be incredibly high risk. There is nothing to stop individuals doing this and it is perhaps understandable that many are worried about a future where this could happen. How will the industry, regulator, Ombudsman react to complaints which suggest individuals should have been protected more from themselves?
This is why the later life advisory community, which of course includes equity release advisers, needs to be sharply focused on educating retirees about what Guidance initially can offer them but also the importance of advice beyond this in order to ensure they have access to high-quality, professional advisers who can deliver not just guidance but recommendations.
If the advisory profession is at the forefront of this debate and is able to get its messages across then we have a much better chance of consumers making the right choices and the outcomes being less likely to be negative. In effect, advisers can be the first, second and last line of defence in the new environment however it is going to require all of us to carry this message ‘into battle’.
Chris Prior is manager, sales and distribution at Bridgewater Equity Release