If there were any doubt about how seriously the regulator views the importance of later life lending as a means of funding future retirement, the FCA’s Emad Aladhal made it clear at the Equity Release Council’s recent Later Life Lending Summit.
Describing specialist later life lending products as a possible ‘fourth pillar’ in retirement, alongside state, workplace and private pensions, Aladhal urged the industry to step up and reach its potential.
But ‘potential’ is the key word here – and, at the moment, the sector is nowhere reaching it.
Despite the fact that over-55s in the UK are sitting on an estimated £3.7trn of property wealth, very few older borrowers are tapping into it to boost their living standards in retirement.
Why? Because most of the time, whether they visit an independent broker or speak with their lender, they only hear about mainstream lending options such as a product transfer or remortgage.
The numbers bear this out. FCA data shows that of the 394,778 loans advanced to over-55s last year, lifetime mortgages and retirement interest-only loans (RIO) accounted for just 7.6%. The vast majority – some 299,980 last year – simply rolled onto a product transfer or switched lenders in a remortgage.
How many of those borrowers do you think discussed the option of taking out a specialist later life lending product with their adviser? I would be surprised if it was one in five.
One of the main reasons is that unless an adviser – independent or those who work for lenders – is operating in the later life space on a regular basis, the home isn’t considered as a part of the financial plan. It’s seen as a place a client lives, rather than a potential tool for retirement security. This can mean clients get incomplete advice.
The reason is that most mortgage brokers, financial advisers, wealth managers and bank staff don’t have the permissions to advise on later life lending products. FCA data shows there are currently 6,155 unique individuals certified to advise on equity release transactions, with the industry estimating around 2,000 active individual advisers. This compares to more than 35,000 advisers in the mainstream market.
That is a sizeable gap to close. The only way I can see it being closed is to create a framework for all advisers to advise across all options or, at the very least, make it mandatory to refer to an appropriately qualified individual.
As the CEO of a lender operating in this space, you might expect me to make this argument. But it isn’t coming from vested interest. It is borne out of concern that we are sleepwalking into a retirement crisis – and a pernicious one, at that.
The Second Pensions Commission’s Interim Report found that 15 million people are currently under-saving for retirement. A separate study by Fairer Finance estimates that roughly 7 million homeowner households aged 55-79 will have a retirement income below the Pensions UK moderate standard (£31,700 a year for a single person and £43,900 for a couple, net of tax). That equates to 46% of homeowner households in that age bracket.
Fairer Finance’s modelling suggests that by 2040 half (51%) of UK households aged 60+ could benefit from accessing their housing wealth to support their spending needs in later life.
The FCA acknowledges the seriousness of the situation, which is why it is currently consulting on how to boost the take-up of later life lending products. Though we won’t know how it plans to do that until the second half of the year.
If I were an adviser or, indeed, a mainstream lender that employs in-house advisers, I wouldn’t wait for the outcome of that review. In fact, I would be assessing my approach to advising older borrowers to see how I could demonstrate that I was truly offering all options, whether by advising on them myself of referring.
After all, Consumer Duty already places a clear obligation on firms to deliver good outcomes for customers and ‘avoid foreseeable harm’. It’s hard to argue that advisers who do not actively discuss later life lending products (or refer) with their older clients are doing that.
If the FCA wants housing equity to become the ‘fourth pillar’ in retirement, then one of two things are going to have to happen. Either we, as an industry, can take the lead on this and ensure that we are having more holistic conversations with clients. Or, eventually, the regulator may have no choice but to mandate it. For me, it’s as simple as that.
Dave Harris is CEO of more2life
