2015 is shaping up to be the year of the retiree given the intense focus on the pension changes – which are but weeks away from implementation – and the speculation on how this might alter the later life product and advice space. ‘Speculation’ is certainly the key word at present as every later life business and commentator tries to second-guess what the newly-retired are going to do with their newly-found pension freedoms.
Will we simply see a continuation of the ‘status quo’ with pensioners valuing the certainty of a regular monthly income; will we see the rise of the 25%-ers all seeking that tax-free lump sum; will the thought of accessing the full pension pot be enough for pensioners to want to drawdown the total amount available, regardless of the tax and potential benefit implications; will we see a large take-up of the Government’s Guidance; will later life advisers see an upsurge in take-up of their post-Guidance advice propositions; will we see headline cases of pensioners who have spent all their pension pots in double-quick time with nothing to show for it; will we see a rush to invest in property; or will we see all of the above?
The word ‘unknowable’ comes to mind at present, not least because insurer propositions are still being finalised, the scope and take-up of Guidance is still in the balance, and we simply don’t know how consumers are going to react when faced with the choices that are now presented to them. We’re not even certain if all those opportunities will be presented to them via Guidance, or how retirees will look to turn guidance hopefully into advice and a recommendation, and then product completion.
While the changes clearly open up a world of possibilities for the newly retired, there are so many different individual circumstances to take into account that you would need an unshakeable faith in order to categorically predict what might happen. There are however some areas which may mean certain choices become more prevalent than others, and one of those could be a greater take-up of equity release products.
Recent research from LV= with regard to retirees’ finances suggest that a number of the key demand drivers for equity release will continue to remain in place, regardless of the ability of those individuals to access their pension pots. Not least of these is the growing level of indebtedness amongst the retired, and these debts cover the full range from mortgage to credit card to other unsecured credit, which are now a natural part of most people’s lives but in the past were normally paid off by retirement age.
This is clearly not the case for many people today as the research revealed that up to one million people are approaching their retirement with at least some level of mortgage debt to their name(s). Now, it may well be that some individuals who have saved significant amounts and have larger pension pots will be able to utilise the new freedoms in order to drawdown cash to pay off some (or all) of these debts. Other homeowners may have benefited from house price inflation and be able to sell their homes, and have enough left over to downsize or move elsewhere. However, a number will not be in such a position and, particularly for those with interest-only mortgages, the capital required to pay off the mortgage may not be readily available.
At this point, equity release becomes a much more relevant, potential solution and advice will certainly be required. Again, we have talked much about advisers ensuring they are in the shop window for retirees because, if the LV= research is anything to go by, advice does not appear to be a major priority for these people. Only a quarter of those over-50s polled said they would be seeking advice prior to their retirement age – again, given the complexities of retirement and the widening of available options this does seem a missed opportunity.
It may well be that the delivery of Guidance encourages those who have been through that process to move on to securing full advice, but we firstly shouldn’t count on retirees taking up Guidance and, secondly, shouldn’t assume they will know where to get advice should they feel it is warranted. Again, this represents a major marketing challenge for the later life advice sector and one that has to be grasped if advisers want to make the most of the significant opportunity that exists here. A whole generation is moving into the new environment with little clue about what it all means – it is up to advisers to help smooth that passage and to create and develop new and existing client relationships.
Chris Prior is manager, sales and distribution at Bridgewater Equity Release