There were many commentators who suggested the new pension freedoms would sound the death knell for equity release plans. Those at retirement age would now simply access their pension pot cash rather than drawing down equity from their home, wouldn’t they? The new freedoms offered by the Government would herald a severe decrease in the number of new equity release plans being sold and it was unlikely that the sector would make the big leap forward it had been threatening.
A few months into the new pension freedom regime, the latest figures from the Equity Release Council appear to show how wrong this commentary was. There’s no disputing the fact that the range of options and solutions available to those over 55 have grown, and there is much more to consider now, however the notion that the equity release market would be hit hard appears to be well off the mark.
Take the latest figures: lending in quarter two this year hit £384.3m, the largest quarter in 13 years. £4.2m of housing wealth is being withdrawn every day and 5,400 new equity release customers took out plans during the second quarter of the year, an increase of 11% on the previous quarter. Looking at the first half of the year we can see that plans totalling £710m were taken out, again the largest H1 total on record – if we continue at this rate the market might hit the £1.5bn mark in 2015, which given the celebrations when the industry went through the £1bn barrier a couple of years back, would be a huge statement.
All in all, it’s clear that the popularity for releasing equity from homes has risen and, given the demand-drivers, this is unlikely to show any signs of pulling back soon, regardless of the pension freedoms. Now, I fully accept that it is very early days to be drawing comparisons between the two parts of the retirement income market but, to my mind, it looks obvious that they will be working in tandem rather than working against each other.
It is a much-used argument, but still completely relevant, that pensioners are (on average) not hitting retirement with six-figure-plus pension pots. For those that are, then quite clearly the option to take some of that pot as cash, rather than opting for equity release, will perhaps be more viable than those whose pot is around the average £25-35k mark. However, there are still some potential repercussions for any individual taking their pension pot as cash, notably tax implications and the potential impact on benefits, not forgetting the risk in determining how much money is required to fund the rest of their retirement.
When all is said and done, those with bigger pots might be looking at this option first but either may come back to equity release later, or may actually think that it is a better option than pension drawdown now. Certainly, the most recent Council figures seem to suggest a growing acceptance by individuals that equity release plans can support their needs, whether they might be paying off debt, gifting to family, enhancing a lifestyle, funding long-term care needs – the list goes on. During the course of the first six months of the year, 10,000 new customers took out an equity release plan for the first time – and given the outlook for many pensioners one can only anticipate this number growing.
Where I think the equity release market has developed its proposition is in the product innovation and changes that play to individuals’ changing needs. This can be seen in the popularity of drawdown lifetime mortgages, the value of which has grown by 12% year-on-year. It comes back to the ability to offer clients flexibility to drawdown regularly, when they need the money, rather than simply insisting that they take it all as a one-off amount. This clearly appeals and I suspect this part of the market will continue to lead the way.
So, overall, the naysayers regarding equity release growth appear to be wrong – the figures suggest there is no slow-down in take-up, in fact quite the opposite. We are effectively seeing a societal shift in which housing wealth is no longer seen as off limits and simply there to be passed down to beneficiaries; instead that wealth is there to be accessed and used to fund retirements which are likely to last much longer than those of previous generations. In this environment, it is plain to see why the major brands and institutions are looking to make their mark in this growing sector.
Chris Prior is manager for sales and distribution at Bridgewater Equity Release