I believe that the pension freedoms, which will allow people over 55 to have unlimited access to supporting pension schemes, will create a completely different environment in which advice on equity release will need to be provided.
To ensure compliance with the new pension rules, all equity release advisers will need to be similarly qualified in the provision of at-retirement pensions advice or work with a pensions adviser.
However, far from bad news for the equity release industry, the pension revolution could create a significant increase in demand in the long term as people create flexible retirement plans; but the dynamics are likely to change fundamentally in the short term.
As specialists in at- and post-retirement planning, we already advise thousands of people on drawdown, based on the current regulations, including the best use of their 25% tax-free lump sum. We will also look at how and where equity release can fit into retirement planning.
There has been a great deal of nonsense written about the impact of the new pension freedoms, and top of the pile is the concern that people will blow their retirement savings and be reliant on the state for support. The reality is most people are conservative and, for many, existing debt is their primary concern and the repayment of loans and mortgages will top the list of priorities; the other requirements will mirror what most people use equity release for, such as home improvements.
However, pensions and equity release can impact on a person’s finances very differently and this will need to be built into an advice process once the pension freedoms take effect.
Quite simply, at an interest rate of 7%, using equity release to access £15,000 will cost over £42,000 in 15 years, but withdrawing the same sum using pension release will incur no charges if it is part of the 25% tax-free entitlement. Even if we factor in depleted earnings over the same 15 years, with a 3% compound rate the sum would be £23,000, which is far lower than the cost of equity release. Advisers will, however, need to explain that any withdrawal over the 25% tax-free allowance will be taxed at the individual’s marginal rate.
It is clear to see that the consequences of a loss in retirement income initially by using pension release is more than made up for financially in the long run due to the ravages of compound interest. As a result, I would expect to see withdrawals from a person’s pension assets in the short term and withdrawals from someone’s property assets in the long term.
The new pension freedoms will allow for flexible retirement planning, so people can use their pension fund in early retirement and equity release in later retirement when it makes more financial sense as there will be less time for a large debt to accrue. There will also be some people who exhaust their fund earlier than anticipated, and equity release can be used to support those who lose that longevity gamble.
Retirement planning is a complex issue and come next April many more factors will need to be considered. With the pension changes now only months away, advisers need to start considering how they will adapt their advice to ensure it is suitable for individual circumstances.
Jamie Smith-Thompson is managing director at Portal Financial
