The arrival of the new pension regime has sparked much debate about its likely impact on the mortgage sector.
The way retirees take their pension funds has changed dramatically but what will be the knock-on effect on the way people finance their housing plans into retirement?
The old adage, ‘my house is my pension’ will never ring truer for many of those in, or about to enter their retirement. But they need to be aware that realising housing equity as a source of funds presents a number of issues.
Although utilising equity in this way can appear both logical and practicable, as with many things on life, things are not that simple.
In the majority of cases, a house is a liquid asset and can be difficult and time-consuming to trade. And if it is a primary residence, the owner/s will still need a place to live in, in retirement.
Drawing down housing equity whilst still living in the dwelling can be a complex procedure and requires specialist advice and products. Alternatively, if one chooses to move and downsize, the emotional effects must be taken into consideration, especially as moving can be unsettling for retirees, leading to materially worse outcomes for health.
And what about those consumers who may wish to hold onto their equity, as a contingency against care costs and/or to pass on as an inheritance to their family?
In August last year, the Chartered Insurance Institute commissioned a survey among those who are the target audience for the then un-named ‘Pension Wise’, the Government’s guaranteed guidance for those taking their DC pension pots announced in last year’s budget.
More than a quarter (27%), said they expected to live on funds from downsizing, with just under a fifth (18%), relying on rents from additional properties. Less than a tenth (8%) favoured equity release in addition to their pension savings. Almost exactly a half (49%), also reported they were still paying a mortgage despite being within five years of retirement.
The landscape appears to be divided into two clear territories: those who are placing their faith in funds from an occupational or personal pension scheme on one hand and others who have financed the purchase of their house with the expectation of becoming mortgage-free prior to retirement on the other.
Whichever path they have chosen to follow, retirees now face far many more challenges than their parents did. The latest reforms heightened them significantly by removing the need to convert the majority of their pension assets into an annuity income. According to one industry commentator: “today's retirees need to be actuaries, fortune tellers and investment managers.”
So how can consumers get the holistic advice that the new reforms are pushing them towards? And how can they access it at a cost that makes economic sense?
Pension Wise has a role to play in this, but it can only inform and signpost.
That surely gives advisers a great opportunity to pick up the baton?
The time has come for them to integrate advice from across a wider range of disciplines to ensure consumers manage their complete asset portfolio and the drawdown process – potentially using a much wider range of vehicles than the traditional annuity.
By providing a professional service that ensures consumers consider their assets at retirement in the round, they have a vital role to play in attaining the better outcomes the Government is seeking to achieve.
(For more details about the mortgage and equity implications for advisers posed by the recent pension reforms, follow this CII link: http://www.cii.co.uk/knowledge/policy-and-public-affairs/articles/thinkpiece-114-hurman-homemade-pensions/34805)
