When the pebble (or should I say rock) of the banking crisis landed in the economic pond, it was inevitable that the ripples would be felt for a long time, as more and more inter-connected markets reacted. And as they reacted, financial products and the planning that surrounds them were also affected – albeit on a slower time frame.
Recent coverage of the demise of final salary pension schemes is an example of falling long-term returns on equities, increased longevity and accountancy rules combining to create the ‘perfect storm’.
The tightening of government finances has led to the first steps in increasing tax revenue. The reduction in higher rate tax relief on pensions for the top earners will of course lead to many reviewing their long-term retirement plans.
As employees of many large, well known companies gradually come to terms with the dent in their pension plan and the void in future income, there will come a time where alternatives come to the fore of people’s planning. Such alternatives must of course include assets as part of the deliberations, which will inevitably incorporate an individual’s property wealth, and may herald part of the move for equity release into the mainstream of middle England’s financial purchasing.
There is no doubting the fact that the ‘Baby Boomer’ generation has become accustomed to the idea of housing wealth, with the past years of seemingly unstoppable growth. A growing percentage of over-50s own investment properties which would have returned a sizeable rental yield during recent years, and of course, the constant stream of television programmes encouraging property renovation as a way of generating capital could not have gone unnoticed.
People have also become increasingly aware of the connection between long-term care funding and their property. This association has been further highlighted following the Scottish Parliament’s approval of free care for the elderly – thus bringing the system adopted within the rest of the UK into question. While the imminent Green Paper into the future of social care hints at an end to the forced sale of the family home to pay for care fees, the expected funding gap will be unsustainable unless property values are taken into account.
This conundrum only serves to highlight the critical role of Government in the overall process of pension planning and long-term care funding. Its views will be central to the development of the market, and SHIP’s recent work to engage with the Government to shape the future of equity release as a viable option is to be welcomed.
However, for the IFA community, unlike the Government, it is only natural to talk to clients about property wealth. For the majority of homeowners in the UK, property forms one of their largest assets, and no adviser worth their salt would fail to include it in a discussion regarding financing a client’s future or IHT planning.
Unlocking the door
As the Baby Boomers head into an uncertain retirement and pension arena, most are aware of the potential of their property as an untapped asset, rather than just a home. This opens many doors for IFAs, and when equity release becomes recognised at a governmental level, those advisers who have identified the products’ potential and worth as a pre-retirement tool for older homeowners will be well-placed.
Demand for equity release is predicted to grow and product innovations will bring it to an ever increasing audience. Future products should be able to cope with a client’s varied property portfolio included in a Self-Invested Personal Pension, and interest-only products may act along the lines of a conventional mortgage arrangement for an increasing number of people prior to retirement.
As opposing forces begin to meet, the options for retirement in the near future have to be put on the table and considered at length. With an ageing population, today’s measures cannot necessarily fit the problems of the future, and while viable options involving property wealth are available, equity release must start to filter into government and IFA discussions.
Jon King is managing director of Hodge Lifetime
