While television would have you believe that life for retired people is akin to the soft-focus self-satisfaction of a Werther’s Originals advert, the reality for an increasing number of people over the age of 65 is somewhat different.
Recent research revealed that a third of older people felt worse off than five years ago, while only 8 per cent witnessed a significant improvement in their finances in the same period.
The survey also showed personal finances to be the biggest concern for people in retirement, with paying bills, the cost of long-term care and being able to afford to stay in their own home among the principal worries.
Clear problems
The problems facing Britain’s pensioners are clear. Energy prices are going up, Office for National Statistics figures point to the fastest rise in the cost of food for 14 years, and council tax bills have increased by 92 per cent in England since 1997, based on a typical band D property.
At the same time, the basic state pension – currently at £87.30 a week – has failed to keep pace with inflation, according to the Department for Work and Pensions.
Many older people live on a limited, fixed income, with scant means of increasing this in order to overcome financial difficulties. It’s clear however, that senior citizens are independent-minded and most would be unwilling to seek support from others if they needed extra money.
When surveyed about their options if facing such a scenario, only 2 per cent of respondents would be prepared to ask family and friends for assistance, while almost a fifth expected part-time employment to be the most likely solution. Following a lifetime of work, such a course of action would be undesirable for many and, of course, relies upon one’s health remaining undiminished.
Changing attitudes
Even if people are less well off in cash terms than they were five years ago, home owners have benefited from substantial house price appreciation over that time.
In 1976, the average property price was £12,704, but that same property would be worth £204,813 at the end of 2006. The typical pensioner owns a home worth £66,000 above the UK average however, and average household equity for the over-60s stands at almost £265,000.
As retired people find their finances squeezed, attitudes towards property are beginning to change. Growing numbers are embracing the notion that their property is a legitimate asset that can be used to generate a cash lump sum or an income.
So much so that 60 per cent of survey respondents regarded their home as their prime means of raising additional funds, either through downsizing (21 per cent) or equity release (39 per cent).
Set for growth
The equity release market – fully regulated by the Financial Services Authority as of 6 April 2007 – is set for considerable growth over the next few years.
Results for Q3 2007 from industry body Safe Home Income Plans (SHIP) showed a 15 per cent increase year-on-year in new equity release plans sold.
New home reversion business rose 20 per cent, to £21.9 million, in the same period, with the market share of home reversion plans expected to increase threefold, to around 20 per cent, over the next five to 10 years.
Overall, the Institute of Actuaries forecast that the £1.1 billion of new equity release business written in 2006, will reach £2.4 billion by 2010.
In the coming years, the effects of the UK’s ageing population, waning pension provision and the nation’s spiralling personal debt – which reached a record £1.35 trillion in June last year – look set to become more pronounced.
Final salary pension schemes continue to close and investment in money purchase schemes is well below the level needed in retirement – particularly when considering our increased longevity.
Consequently, housing equity will assume an even more important future role and equity release will become an essential retirement tool, helping people to raise funds to provide for their later years.
However, while equity release can provide an answer to financial troubles, it is by no means a sector targeted principally at poor home owners in desperate need of cash.
The average property value of those entering into a home reversion plan between 2002 and 2006 was almost £200,000 – significantly higher than the £168,000 national average in the same period.
The uses of equity release are as varied as the people who enter into plans. Far from a last resort product, people are choosing to use the value in their homes for a multitude of reasons – whether it be supporting grandchildren through university, making home improvements, meeting the costs of divorce or venturing on a dream holiday.
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