FCA’s Andrew Bailey cautions on equity release

Speaking to the Pensions and Savings Symposium in Scotland, Andrew Bailey said some saw the product as expensive and complicated.

His speech addressed the problem of how savers can put aside enough money for their retirement in a low-rate, low-growth environment.

Mr Bailey disagreed with his former Bank of England colleague Andy Haldane, who notoriously said property was better than pensions.

An alternative he suggested was using housing to fund retirement through downsizing or equity release.

But Mr Bailey did express some concerns about this particular product.

My note of caution here would be that while the approach has an appeal in terms of the lifetime investment pattern, the accompanying financial instrument is made much more complicated by the need.Andrew Bailey

He said: “An alternative approach, again best viewed within the lifetime model, is that rather than save for housing and retirement income at the same time, people would use the former to fund the latter.

“The distinction here with my earlier point on the weighting of property investment in a portfolio is that here the focus is on how much they invest in their own dwelling over their lifetime.

“Some argue that the costs of equity release, both up front and compounded over time, are relatively high for the individual which signals a note for caution. Others, however, can point to potential benefits, especially for those who want to remain in homes they’ve worked and paid for over their lifetime.

“My note of caution here would be that while the approach has an appeal in terms of the lifetime investment pattern, the accompanying financial instrument is made much more complicated by the need – again consistent with the lifetime model – to embed in it a no negative equity guarantee.”

Equity release sales have soared, with homeowners over the age of 55 withdrawing a record £8.2m of housing wealth every working day between April to June, as quarterly lending surged past £500m for the first time since the Equity Release Council began keeping records.

Mr Bailey said investing in property rather than a pension could be “self-defeating” because it would fuel the Financial Policy Committee’s concerns about household indebtedness.

He said: “If the effect of increasing the demand for housing as an asset to own is to push up the cost of ownership, an increase in holdings of housing as pension assets will tend to increase the real cost, and thus household indebtedness.”

Mr Bailey added that retirement saving and pensions is “one of the largest issues we face” but said it needed to be considered broadly.