Older people’s ability to maximise their security in retirement is essential at a time when responsibility (and risk) for later life financial well-being is increasingly individualised. Inadequate pension income, paying for the costs of care, and an increasing debt burden are just some of the factors driving the need for individuals to secure additional sources of later life finance. Notwithstanding intra-generational differences and geographic disparity, housing wealth remains UK households’ largest single asset, particularly for those aged 55-74[1], and these broader socio-economic shifts are strengthening the role and relevance of housing equity for retirement security.
Equity release products, otherwise known as lifetime mortgages, are financial products designed specifically for those aged 55 and over. They allow the release of housing wealth without the need to move or make (compulsory) repayments by instalment, and in the last few years there has been considerable expansion in the lifetime mortgage sector. Recent figures suggest that there are now 221 product options available and that lifetime mortgages account for around a third of all mortgages taken out by people from their mid-50s onward. This is an increase from less than a fifth in 2005-2008[2].
Meeting changing needs and circumstances throughout retirement
Alongside more product choice, there is a growing trend towards better value and more flexible products.
As life expectancy increases, people have to manage their income and assets over a longer period than past generations, so the need for safe, suitable financial products that meet people’s changing needs and circumstances throughout retirement has never been greater.
Our research[3] with equity release consumers revealed a number of limitations relating to the inflexibility of traditional product offerings: for instance, it highlighted the unease and anxiety that some owners felt as a consequence of the progressive impact of accumulating interest and dwindling equity. It also indicated that some customers found themselves unable to move to a more suitable property when they needed to due to deteriorating health, isolation, and/or having too much space to manage.
But with an increasing range of providers now offering interest rates below 5 per cent, options for paying interest on the loan, and many new plans offering the flexibility of making voluntary repayments without penalty, consumers will have greater scope to limit the overall cost of releasing housing wealth and the opportunity to feel more financially secure.
The number of plans that can be secured against sheltered or specialist retirement properties has also doubled in the last year, signalling a positive step towards ‘future-proofing’ these products.
With greater choice, advice is crucial
Undoubtedly, new product features and flexibilities offer the opportunity for a more effective equity release market, and for more people to use their housing assets to adapt their homes, support their incomes, or pay for the costs of care[4], but greater choice brings the potential for greater risk of financial loss resulting from suboptimal product choice, and the potential to complicate the wider decisions individuals must now make about how to use their savings in later life. In the post ‘pension freedom’ environment, older people will increasingly need advice about both mortgages and pensions, using assets to pay for care, and how they affect each other. But the current framework doesn’t easily allow for this. Consumers have to seek advice from different professionals before deciding what to do.
The creation of the Money and Pensions Service has the potential to provide a more joined-up approach across the financial services industry which should make it easier for consumers to consider their income and asset portfolio holistically.
Regulated financial and legal advice is a mandatory part of the process for consumers looking to take out equity release plans (from an Equity Release Council-compliant provider), but our research demonstrates that information about equity release can appear complex, overwhelming, and difficult to process[5]. It is vital that consumers can obtain and process the information necessary to make informed decisions about their housing and other assets, and this remains an ongoing challenge for the industry and wider later life advice sector.
Dr Louise Overton is a Lecturer in Social Policy at the University of Birmingham.
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[1] ONS (2018) Distribution of aggregate household total wealth by age and wealth component, Great Britain, July 2012 to June 2016
[2]https://www.equityreleasecouncil.com/document-library/erc-spring-market-report-2019/
[3] Fox O'Mahony, L. and Overton, L. (2015) ‘Asset-based welfare, equity release and the meaning of the owned home’, Housing Studies, 30(3), pp.392-412; Overton, L. and Fox O’Mahony, L. (2015) The Future of the UK Equity Release Market: Consumer Insights and Stakeholder Perspectives
[4] House of Lords Select Committee on Public Service and Demographic Change (2013) Ready for Ageing? London: The Stationary Office (p.138)
[5] Fox O’Mahony, L. and Overton, L. (2014a) ‘Financial Advice, Differentiated Consumers and the Regulation of Equity Release Transactions’, Journal of Law and Society, 41(3), 446-469.