The recent reforms in the pensions arena will drive up demand for equity release as part of increased demand for borrowing into retirement, experts told FTAdviser, however questions have been raised whether enough funding will be available to cope with this expected demand.
Ray Boulger, senior technical manager at broker John Charcol, said sales of equity release have not increased substantially for several years but that the pension reforms could turn this around.
Speaking to FTAdviser, he said: “Equity release is one of those markets which has promised to increase quite substantially for several years and actually it hasn’t done so, but this [the pensions reforms] is one of those things which could give it an upwards push.
“For those people who end up with a mortgage when they retire that they either can’t afford to pay the interest on or don’t want to, even though they could afford to pay it, or would struggle to find a lender that would lend to them, a lifetime mortgage is one of the options they could consider.
“I think as the lifetime mortgage market develops and there are now options available with more flexibility where people can draw down the money over a period of time or pay the money back, where they have the option to pay the interest.
“There is one scheme for example that allows people to pay back up to 10 per cent per annum without incurring the overpayment charge, which means they can pay the interest and a bit more if they want to - so as that market develops with more choices it will become a viable option for more people so I do think that market will grow - certainly expand quickly - over the next few years more than it has done over the last year.”
Stuart Wilson, managing partner at Later Life Academy, said: “In simple terms it [the pensions reforms] will create increased demand for borrowing into retirement, of which equity release is a part.
“The indirect impact of pension changes will make more people in at-retirement more keen to explore their options - that is one of the outcomes the chancellor had in mind.”
Mr Wilson said that historically people have wanted to do equity release but have not qualified for it because they have not been able to raise enough to pay off their primary mortgages, let alone enter into equity release agreements.
He added people will “be able to restructure their debt and that restructure may look more like equity release because it is geared more for the 60-year-old consumer than most conventional mortgages.
However, Mr Wilson warned that due to the recent blows to the annuity market, there may not be enough funding for the equity release market.
He said: “We may not have enough funding to provide that demand - changes announced in the Budget have killed the annuities market. The annuity market funds the equity release market in virtually all cases. If no-one is taking any annuity money in then there will be nothing to lend out.
“The equity release market needs to find additional sources of funding - they are not very apparent.”
Mr Wilson said that two providers, More To Life and Partnership have already increased their minimum ages and across the board rates have gone up between 0.25 per cent and 0.3 per cent.
He said: “We are certainly seeing a tightening in the market.”
However Chris Prior, manager of sales and distribution at Bridgewater Equity Release, did not agree that the pension reforms would have a huge effect on the equity release market.
He said: “The average pension pot is £17,000 and the average release from equity release is £64,000 - people may be more aware that these small pots are not going to have the amount of money needed - but I don’t think it will have a major effect on the equity release market.
Mr Prior made the point that whatever consumers decide to do it will have an impact on benefits and there will be tax implications so they will need to seek good financial advice.
He said: “It is going to be quite a different world when people take these pension pots...but it will all be down to individual circumstances. I wouldn’t have thought it would have a major impact on the equity release market.”
ruth.gillbe@ft.com
