Pensioner poverty is a problem we read and hear about but usually not something we feel we can do much about directly in our day to day working lives. There’s little demand for financial advice or solutions from those struggling to make ends meet.
An exception is the increasing numbers of people who prioritised buying a home during their working lives who are now struggling on low incomes in retirement. This generation born after the war generally did well by investing from property but many found it much harder to build up sufficient pension savings.
Home ownership rates among pensioners are high. Around 85% of pensioner couples and two-thirds of single pensioners are owner occupiers. And today’s average home price of £162,000 far exceeds the value of the pension pots used to buy annuities which are typically around £25,000 and may buy a 65-year-old £1,000-£1,500 income each year to supplement the state pension.
Housing equity withdrawal either through downsizing or equity release plans is a complex area, both financially and emotionally. It requires people to make major, potentially irreversible decisions about their lifestyles and also to understand the consequences on their taxes, benefits and inheritance plans.
Equity release is one area where professional financial advice is essential. Last year we published extensive consumer research into the attitudes of older homeowners that revealed 8% or around 600,000 pensioner households might be interested in taking a plan, but barriers to market growth included lack of understanding about how the plans worked and where to seek advice.
Given the potential for growth among the ageing ‘asset rich, income poor’ population, it is not surprising that equity release providers who offer training and support are reporting increasing interest in learning more about the market from financial intermediaries, both general practitioners and those involved in the mortgage arena.
One reason for this is that many retirees have so much of their wealth tied up in property that it is wise for them to make financial plans about how to factor it into their retirement cash flow or pass it on, either before or after death.
Another is the retirement income squeeze and that older people are more likely to be heading into retirement with debts, perhaps maturing interest-only mortgage loans they have no way of paying off.
To understand more about how evolution of the equity release market could help those on lower incomes we commissioned a major economic study by independent consultancy Oxford Economics. About 1.7 million pensioners live in relative poverty, defined as those pensioners whose disposable income is less than 60% of median household income.
The report shows that on current market projections, equity release could help nearly 1.1 million pensioners escape relative poverty for a year between 2012 and 2040. More innovation, in this case a notional £60,000 equity release plan paying out £5,000 a year for 12 years, could increase the number helped between 2012 and 2040 to somewhere between 3.8 million and 22.8 million.
State help is, quite rightly, focused on the poorest sections of society. Equity release, however, could provide a solution to those on the next level up, those pensioners who managed to buy a modest home but are now facing an old age with many financial struggles.
Our research holds some important pointers to financial intermediaries about where the equity release market is heading and how demand is likely to increase.
But its main aim is to provide hard evidence to policymakers who are increasingly recognising the need for joined-up thinking at the highest levels about using equity withdrawal. This is money that can only be spent once, so it needs to be spent wisely.
