Royal London and Responsible Life sponsored financial services consultancy The Lang Cat to produce a report on the equity release sector.
The report looked at how adults in Britain made use of housing wealth in later life and said the sector had historically been met with disdain or suspicion but learned from its mistakes and was “quietly pulling itself up by the bootstraps”.
The report did not look at specific products but instead at the role of home equity in later life income and freeing up family wealth for the benefit of younger generations.
Tom McPhail, director of public affairs at The Lang Cat, said: “That is, we think, a huge issue and one which could potentially change how people approach retirement income.”
The report said the UK’s population faces “significant financial challenges” as the resources available to meet the retirement income needs of an ageing population are already stretched and set to get worse.
It found the UK had reached peak defined benefit, or final salary pension, with many retirees “struggling to enjoy even a moderate standard of living”.
It added: “At the same time, the financial penalty of youth means today’s twenty-somethings are struggling to pay off student debt, build a house deposit and get on in life. After two years of Covid, available state resources to alleviate these pressures are limited; taxes are already rising just to ease NHS waiting lists and there is an escalating cost of living crisis.”
The report said pensioners suffered a “retirement income deficit” of over £48bn a year despite the majority owning their own home and having potential access to £250,000 housing equity.
“Yet very few are accessing this wealth to supplement their retirement income,” it added.
On the other end of the scale, first-time buyers with average ages of 30 and over who are struggling to raise deposits, are receiving inheritances too late in life to help them to get onto the housing ladder.
The report said people’s misunderstanding of how housing wealth could assist with financial needs was partially down to their longstanding perception of the later life sector.
It added: “Such reservations are understandable. However, they do not reflect the reality of today’s products, standards and regulatory controls. In spite of years of painstaking efforts on the part of the industry to improve the quality of advice and the financial products recommended to customers, equity release is still not widely considered as a solution.”
The report said the whole industry had a role to play in normalising the use of housing wealth as there remained a “remarkable disparity” between the sector’s reputation and reality.
Pension deficit
The report said many retired and soon-to-be retired people did not have a sufficient pension or financial wealth for a “comfortable later life”.
The Lang Cat added: “The defined benefit (DB) boom is ending, defined contribution (DC) pots are often inadequate and the state is creaking under the pressure of a dependency burden which is set to increase.”
It also said the UK government faced a “tax and spend” challenge, as people are living longer, government spending is weighed in the favour of older people and there are relatively fewer young people to pay for these costs.
The report said: “Unfortunately, the UK’s retirement savings are currently inadequate to meet the financial needs of retired people in this country. Some people are well provided for, but many are not. This problem is only set to get worse over the next 20 years.”
It also said the inheritance tax system encouraged people to keep their wealth in their homes rather than use it.
Adviser and regulatory silos
The Lang Cat said some advisers and wealth managers were reluctant to suggest equity release to clients due to its perception or it being a specialist product. Further, some did not see it as central to their role.
From a regulatory perspective, it said the FCA focused on advice given instead of advice not given, meaning there are no obligations for advisers speaking to older clients to mention equity release.
It said: “This is an illustration of the perennial problem: the FCA is not held accountable for the good outcomes its regulation fails to encourage, only for the bad outcomes it fails to prevent.”
The report said government guidelines around property wealth were unclear, as despite pledging that nobody would be forced to sell their home to pay for care in 2019 there was a lack of dialogue around the use of housing equity.
The Lang Cat said: “The government talks about levelling up and undoubtedly it is looking for ways to mitigate the cost of living crisis. It seems an easy win for the government to take another look at equity release and to consider the role it could play in easing some people’s financial pressures.”
Recommendations
The Lang Cat made recommendations to bolster the use of equity release and improve the sector’s reputation.
These included incorporating housing wealth into Pension Wise advice, scrapping the £175,000 home allowance element of the inheritance tax exemption and for equity release to be treated as more than a subset of mortgage regulation.
Will Hale, CEO of Key Later Life Finance, said: “Today’s report not only clearly highlights the challenges facing consumers, policy makers, the regulator and industry participants when it comes to integrating housing wealth into retirement planning but also looks at potential solutions.
“However, this potential can only be achieved if we focus on working together in overcoming barriers such as advice silos and lack of customer awareness around the benefits of incorporating housing wealth within their financial planning.”
Alice Watson, head of marketing (insurance) at Canada Life, added: “Retirement readiness is becoming a problem for modern retirement journeys as fewer people are able to rely on generous defined benefit incomes. Twinned with this, as the report mentions, is the struggle faced by younger generations trying to get on to the property ladder. The result is a squeeze on what becomes an increasingly limited pool of resources.
“In these cases, tapping into housing wealth could be an answer, whether it’s to ensure care needs can be met, helping a first-time buyer to get a deposit or simply topping up your day-to-day income.”
