Pensioners in the UK are struggling to enjoy their retirement, research by the Lang Cat revealed. This is because median pensioner incomes “don’t even reach the ‘moderate’ standard of living defined by the Pensions and Lifetime Savings Association (PLSA)”.
And as generous defined benefit (DB) pensions are being phased out, UK retirees suffer a retirement income deficit of £48bn ($60bn, €56bn) a year, the consultancy firm found.
In a bid to solve this issue, retirees are turning to equity release. A report by Legal & General Home Finance discovered that, in 2021 alone, more than £3bn of retirees’ domestic spending was funded via equity release.
And, according to projections by economic analyst firm Cebr, the sum is set to increase to £4.1bn in 2022 and surpass £11bn by 2032.
Due to the soaring value of houses in recent times, property wealth is bound to play a significant role in people’s financial planning, as well as become an alternative way to fund retirement.
Regulatory revamp
But the Lang Cat report found there are deficiencies with the regulation of the equity release market, especially when it comes to financial advisers.
It said: “The FCA regulates equity release as an extension of the mortgage market. Regulation is siloed and currently, equity release sits in the mortgage silo.
“There is no explicit obligation for an adviser dealing with a customer in their 60s and older to advise on the consumption of housing wealth, even when advising on retirement income needs. The FCA expects advisers to take all relevant personal and financial information into account.
“However, it doesn’t appear that an adviser overlooking the option of accessing housing wealth and instead focusing solely on pensions and other financial assets is likely to risk censure from the FCA.”
But the consultancy firm also said that “positive action needs to come from the top”, as the government needs to do more.
The Lang Cat added: “This isn’t a new phenomenon. But it is becoming increasingly pertinent with the inaccessibility of housing to younger generations and the perennial failure of our regulator to foster a culture and marketplace for financial engagement and effective long-term planning for the wider population.
“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.”
The Lang Cat also discovered that people perceive housing wealth to be unsuitable to cater to their or their offspring’s needs, which was also fuelled by “the industry’s misdeeds of the past”.
Recommendations
The consultancy firm has made a series of recommendations for the UK government, the FCA, advisers and the equity release space, which are needed to improve engagement with the sector.
Some of the main ones include:
- Incorporating housing wealth into the Pension Wise guidance process;
- Financial planning to include the option for savers to consume housing wealth after the age of 50;
- Scrapping the £175,000 home allowance under inheritance tax exemptions;
- Regulating equity release as more than a subset of mortgages and as an component of investment and income planning;
- Requiring financial advisers to complete equity release continuing professional development (CPD) training on an ongoing basis;
- Building housing wealth decumulation into advisers’ cashflow recommendations; and
- Addressing product shortcomings, including the development of regular income products.
‘Easier’ times
Tom Selby, head of retirement policy at AJ Bell, believes that filling retirees’ income deficit is going to require a significant increase in savings as well as a hard look at future pension models as DB schemes are slowly disappearing from the market.
“Bridging the £48bn annual gap between the income retirees receive and the amount required to enjoy a ‘moderate’ lifestyle in retirement will require a huge ramp-up in savings levels.
“It’s worth remembering that this gap exists even among a retired population which was more likely to enjoy generous guaranteed defined benefit (DB) pensions than future generations.
“What’s more, home ownership was much easier to attain for this generation than it is for younger people, meaning they have an extra resource they can potentially tap, either through downsizing or equity release.
“Both of these avenues would incur costs of course, and getting good quality, independent advice is a must when it comes to equity release.”
What about young people?
But Selby also believes that financial advisers should focus on those “who don’t have the luxury” of being able to tap into housing wealth, making it much harder for them to find alternative income streams in later life.
“The retirement challenge for younger savers – who are less likely to have housing wealth to unlock – will likely be even more significant than for so-called ‘baby boomers’.
“Unfortunately, for those without significant non-pensions assets there are no magic beans delivering a £20,000+ annual income in retirement and in many cases automatic enrolment will leave people well short of what they need.
“Anyone wanting to enjoy a ‘moderate’ or ‘comfortable’ retirement will therefore need to take responsibility today, saving decent amounts regularly and making the most of employer contributions, tax breaks from the government and long-term investment growth.
“The alternative is to retire on less or push back the date at which you stop working – neither of which will be particularly palatable options for lots of people.”
