Equity Release Council Launches White Paper – Equity Release Rebooted: The Future Of Housing Equity As Retirement Income
Wealth amassed by homeowners via mortgage capital repayments increased by 54% from £40.7 billion in 2005 to a record £62.7 billion in 2016.
- Total homeowner equity in England alone reaches an unprecedented £2.6 trillion, with £1.8 trillion belonging to over-55 households – a figure forecast to double by 2036.
- Housing equity can ease the retirement income crisis as defined contribution (DC) pension savers face a pension equivalent to only 15% of their final salaries.
- Report sets out key steps for equity release sector and future government to build on recent progress to help ease the retirement income crisis for a diverse consumer population.
- The Council urges future government to abandon ‘semi-detached’ attitude to equity release and establish policy team dedicated to promoting product as part of retirement checklist.
Wealth accumulated by UK homeowners through mortgage repayments has rocketed in the past decade to a record £62.7 billion in 2016 – paving the way for housing wealth to play a vital role in funding later life as a pension income crisis looms, according to a new report published today by the Equity Release Council.1
The report – co-authored by Rob Thomas and Dr Louise Overton2 – takes stock of the changing role of housing wealth in the post-‘pension freedoms’ retirement landscape, assessing the progress made by the equity release sector and the challenges ahead in meeting consumer demand.
It shows that wealth accumulated by homeowners via regular and lump sum repayments of mortgage capital has increased from £40.7 billion a year in 2005 to £62.7 billion in 2016: the highest figure since records began in 1999. This far exceeds personal pension savings outside the workplace [see graph 1] and compares to estimated total contributions to UK private pensions of £70 billion in 2012 (the latest year where data is available).
At the same time, the equity tied up in people’s home has never been greater. Total homeowner equity in England alone reached £2.6 trillion last year, with 69% (£1.8 trillion) belonging to households aged 55+. Based on demographic projections and modest house price growth, this age group’s housing wealth is forecast to nearly double to £3.6 trillion in the next twenty years (2036).
Graph 1: Accumulation Of Wealth Via Mortgage Repayments (£ Millions Per Year)
Source: Bank of England, repayment of mortgage principal by type of lender/HMRC, personal pensions: contribution and tax relief statistics
Housing Wealth To Fill The Gap Left By Inadequate Pension Income
These trends come as millions of workers face severe reductions in income when they retire, owing to the shift from defined benefit (DB) to defined contribution (DC) pension schemes. The report illustrates that a DC pensioner with contributions of 8% throughout their working life – soon to be the minimum required under auto-enrolment – can expect to retire with a pension that provides only 15% of their final salary. This is just a fifth of the pension an identical worker in a DB scheme would enjoy.
Against this backdrop of reduced income in retirement, coupled with demographic challenges including an ageing population and rising social care needs, housing wealth has the potential to play a vital role in helping more people to meet a range of financial needs in later life. The report highlights that the average worker potentially accumulates twice as much wealth via mortgage capital repayments each year than they contribute to their pension (£4,480 vs. £2,240). Housing is also a more commonly held asset with 17.7m owner-occupiers compared with 10.3m employees with a pension.
Maximising The Potential Of Equity Release
Equity release has emerged in recent years as an increasingly popular product for UK homeowners, having just seen record annual growth in new customers and total lending in Q1 20173. Such growth has been supported by advances in innovation, competition and product flexibility, helping to widen its appeal to a broader range of consumers.
This has also come at a time when the later life landscape has been shaken up by socio-economic changes and regulatory reforms such as the 2014 Mortgage Market Review (MMR) and 2015 pension freedoms.
As the market continues to evolve, the report outlines a number of key areas of focus. Firstly, while the pension freedoms provide new choice and opportunity for retirees, there is a need to enhance the understanding of later life finance options among advisers and consumers. The creation of a new, single body for public finance guidance has the potential to provide a more joined-up approach across the equity release sector and other key players in the market.
Secondly, while technology can improve communication methods with consumers, the report suggests that the market must be mindful that online and interactive tools are not always appropriate or desirable, and must be used alongside traditional methods to ensure information is accessible to all. It also suggests that greater emphasis on the role of ‘soft skills’ training in supporting a positive customer relationship, in which the customer can ask questions and take the time to reflect on information before making decisions, may help to support good consumer outcomes.
Thirdly, for more people to benefit from equity release, it proposes that government and industry can work together to help normalise equity release as a socially acceptable vehicle for retirement finance, by tackling the lingering stigma attached to debt in later life.
Fourthly, the report highlights how continuing product developments in the equity release industry can help unlock the potential for wider uptake among an increasingly diverse consumer population, with ‘future proofing’ enhanced by new product features alongside financial and legal advice and product safeguards.
It also urges the next government to abandon the ‘semi-detached’ attitude towards equity release that has been held by previous governments. In calling for government to go further in supporting industry growth, The Council calls for government to establish a dedicated policy team committed to promoting equity release as a safe product that should be on all homeowners’ retirement planning checklist as they approach later life.
Nigel Waterson, Chairman of the Equity Release Council, commented:
“A major consequence of reforms to the retirement landscape is that pensions are now fully realisable and inheritable assets, just as other financial assets and property are. This makes it possible for retirees to plan their finances by considering all their assets, including their home. For many homeowners, the logical conclusion of a more structured approach to retirement planning will be outcomes that include the release of housing wealth to meet a range of financial needs.
“Increasing product innovation, competition and flexibility has seen the equity release sector ‘rebooted’ with great potential to build on current growth. As this report sets out, there are important roles for industry, government and regulators to play in the next stage of the market’s evolution, so that the UK’s ageing population can take advantage of their considerable property assets to enjoy a more financially comfortable retirement.”
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Notes To Editors
1 ‘Equity release rebooted: the future of housing equity as retirement income’, authored by Rob Thomas and Dr Louise Overton, published April 29th 2017.
2 About the authors:
- Rob Thomas is a Director of Research at Instinctif Partners with a specialist focus on financial services and the mortgage and housing markets. He previously served as an economist at the Bank of England from 1989-1994, a high-profile analyst at the investment bank UBS between 1994-2001 and as senior policy adviser to the Council of Mortgage Lenders (CML) from 2005-12. He was also the project originator and manager at the European Mortgage Finance Agency project (2001-05) and created the blueprint for the government’s NewBuy mortgage scheme.
- Dr Louise Overton is a Lecturer in Social Policy and member of the Centre on Household Assets and Savings Management (CHASM) at the University of Birmingham. She specialises in financial provision for later life and has carried out extensive research on the role and relevance of housing wealth as a source of retirement funding, with a particular emphasis on equity release. Her published work in this area includes: ‘Housing and Finance in Later Life: A Study of UK equity release customers’ (2010); ‘The Future of the UK Equity Release Market: Consumer Insights and Stakeholder Perspectives’ (2015), and ‘Consumer Demand for Retirement Borrowing’ (2015)
3 Equity Release Council lending figures, Q1 2017