No one wants to retire only to find after a few years their income is too low to pay the bills. But many of the UK’s poorest households are retired people living on less than experts calculate is the minimum needed for a decent standard of living. What can be done to help them?
Average income is about £200 a week after tax and benefits for the 1.6 million retired households in the lowest income quintile, according to official figures. In total, that covers about 2.2 million of the 11 million retired people.
But those same households show surprisingly high levels of home ownership. Nearly four in five (79%) own their home – almost all without a mortgage – which is higher than all but the top quintile where average incomes are more than £1,000 a week.
This could be because these ‘property rich, cash poor’ people prioritised buying a house and clearing the mortgage over saving into a pension or making other investments. Certainly, their income from private sources is lower than other groups and they also receive less in benefits and State Pension.
Given that it is unlikely pensioners will find it easy to jump back into paid employment or that benefits will become much more generous, this high level of home ownership could offer a practical solution for many of those struggling to make ends meet.
There is nothing new about retirees tapping into property wealth – downsizing is common, there are tax breaks for renting out rooms. However, there are strong reasons to think equity release has a key role to play in the future.
The need to boost retirement income is one reason equity release borrowing has quadrupled in a decade to around £4bn a year.
The real growth could be yet to come as significant numbers who exercise ‘pension freedom’ in the early years of retirement run down their pots and fall back on other assets.
It’s likely that the fastest growing area in mortgage lending could be lifetime mortgages (LTMs) and retirement interest-only mortgages (RIOs) as people approaching and in retirement become more comfortable with borrowing in later life.
Lenders are excited about this business opportunity. Moneyfacts reported that the number of RIO providers had nearly doubled in two years to 22. The Equity Release Council saw the number of lifetime mortgage product options increase by nearly 100 to 500 during 2020.
Increasing competition and choice is great news for customers and for mortgage brokers active in later life lending to complement and build on their core business of arranging loans for home ownership.
Firms can offer the advice themselves or, where it doesn’t fit their business models, pass enquiries on to trusted referral partners who specialise in this highly complex area.
High home ownership levels among retirees with the lowest incomes are an example of the kind of niche borrower that is increasingly being catered for by later life lenders. Official data shows that half of retired households in the lowest income quartile are aged 75+. Single women make up half (50%) of clients with single men accounting for 18% and couples the remaining 32%.
Dealing with this segment of the market demands rigorous advice standards. Equity release is subject to some of the strictest regulatory scrutiny of any area in financial services. This is to be expected and welcome when dealing with a long-term product for customers who are likely to be older and potentially more vulnerable.
Good, regulated advice will carefully explore the pros and cons of each customer’s situation to determine if equity release is the right solution for them.
Among those on low incomes the first priority for advisers is to ensure they are claiming their full entitlement to benefits before considering other options. Our annual State Benefits survey regularly reveals a high proportion of homeowners seeking equity release are missing out on thousands of extra cash each year.
This is a good example of why advisers must not ‘box tick’ but closely scrutinise and challenge customers’ assumptions and understanding, making sure personal recommendations are solutions tailored around the specific customer’s needs, taking account of their individual circumstances and risks.
An ageing population and a squeeze on pension incomes points to a bigger role for the trillions of pounds tied up in the homes of people approaching and in-retirement. That will not only be for income. Some will want to find tax efficient ways to pass money on to loved ones earlier so they may see their families enjoying the benefits when they most need it. Others will want to adapt their homes to provide a better environment to accommodate their changing needs in later life.
Whatever the reason for a homeowner to consider using the value in their home value, there is a growing opportunity for brokers to expand their businesses into an area that is becoming too large to ignore.
Simon Gray is managing director of Hub Financial Solutions
