Equity Release  

Equity release ‘shifting landscape of retirement planning’

Equity release ‘shifting landscape of retirement planning’

The number one reason for UK borrowers releasing equity from their homes is to boost their pension income and savings, as record low interest rates continue to eat into pension pots, a report has found.

According to the Equity Release Council’s 'Home Advantage' report, out today (August 18), the majority of homeowners (57 per cent) are interested in accessing money from the value of their property in later life. 

The report highlighted how the shift away from secure jobs with long tenures to less secure employment and self-employment with greater job mobility was affecting younger generations’ pension incomes.

It found nearly half (49 per cent) of people surveyed in their thirties have already had five or more jobs in their career – almost as many as those in their sixties (55 per cent).

“Modern workers will have lower pension income on average than some earlier generations, increasing the need for other sources of funds,” the report found.

This is compounded by a growing number of thirtysomethings whose financial futures are developing a lot later than expected. Nearly half (46 per cent) of homeowners in their thirties have relied on financial help from family or friends for instance.

Stephen Lowe, group communications director at Just, said this highlighted how "powerful societal forces are shifting the landscape of retirement planning.

“These changes bring both threats and opportunities but there is a clear theme that equity release will have an increasingly important role to play in helping people plan for retirement and enjoy a better quality of life in their later years.”

With the UK base interest rate falling to 0.1 per cent in March 2020, a large savings pot is now required to support a set retirement income.

In 1991, the Bank of England base rate was 14 per cent and 10-year government bonds yielded more than 10 per cent. But at the start of 2021, the 0.1 per cent base rate meant the yield on 10-year government bonds had fallen to 0.3 per cent.

Pension incomes have also been affected by an increasingly ageing population, and the shift from defined benefit to defined contribution schemes as private sector employers become increasingly unwilling to shoulder the cost of reduced investment returns.

As a result, a significant gap between these types of pensions has emerged. For every £1,000 a typical employee received in their last annual salary, they could expect £670 from a DB pension in retirement but just £150 from a DC scheme, according to the ERC report.

For Lowe the UK is “rapidly approaching a time when this is replaced by the different outcomes for those who own their own home and those that don't."

He added: “For the mass market of 'Middle Britain' consumers, buying a home and creating equity rather than renting will have a profound effect on people's ability to meet their own retirement aspirations.”

The report estimated savings from getting a mortgage versus renting over a 30-year period stands at £326,214 today.

David Burrowes, chair of the ERC, reckons “there is no sign of the pace of change slowing down in the post-pandemic world” when it comes to the popularity of equity release - both as a supplement for declining pension incomes, and as a way for parents to help their children onto the property ladder.