Equity Release could help millions in retirement
Published ¤ 19/07/2013 09:54:51
There is a growing acceptance that equity release will have an important role to play in helping Britain’s future pensioners maintain their standard of living through retirement.
Decades of house price gains have laid the foundation for cash-strapped older people to tap into some of the wealth tied up in their homes to provide extra income.
Recent research has revealed that this is unlikely to be a British phenomenon. Many other countries across Europe are facing up to the same issues – an ageing population, a squeeze on pension income and constraints on State support. And while we may be famous for our obsession with owning our own homes, the reality is that home ownership rates are actually higher in many of our neighbouring countries.
Global professional services firm Towers Watson believes that all the ingredients exist for the growth of a strong market for equity release products across Europe.
Its report Equity release – accessing housing wealth in retirement shows that while UK workers can expect their income to fall when they cease work, most workers in other European countries face even sharper declines.
Pension replacement rates – the proportion of average pension income from State and private pensions compared to the average wage – may seem a low 69 per cent in the UK, but the research shows this is well above the European average of 62 per cent.
Although home ownership rates in Germany (53 per cent) and France (63 per cent) are below the European average of 71 per cent, the analysis suggests their low pension replacements of 59 per cent and 49 per cent respectively raise the potential for strong equity release growth in the future.
Sweden, Norway, Poland and Portugal are also seen as having high potential demand for equity release.
The study rates future demand in the UK, Spain, Italy, Ireland, Norway and Hungary as moderate. We may consider our equity release market at a fledgling stage but competition and innovation mean we are more advanced than most other countries. Ireland, Spain and Hungary are starting to develop markets, while ‘private’ models exist in countries such as France and also Sweden where family members rather than corporations may put up the investment.
This insight into how the equity release could develop across different countries is important because Europe has become the source of so much of our legislation and regulation. Europe is now an active player in deciding how our markets develop. In this country, great efforts are being made to encourage policymakers to understand and factor equity release into their thinking in areas such as pensions, taxation, welfare and health.
We need to do the same on a European scale, keeping a close eye on whether the Eurocrats are helping or hindering development of a competitive market that truly addresses the demographic challenges and meets the needs of consumers.
The need for joined-up thinking was identified in the Towers Watson report which highlighted the problem caused by Solvency II proposals to lump equity release lifetime loans into the same category as conventional mortgages. It identifies a "key weakness" that equity release assets are not recognised as appropriate assets to back long-term liabilities. The effect of this could be to discourage insurers from offering equity release plans, reducing competition and innovation and generally stifling the market.
The vast majority of UK equity release plans are lifetime mortgages but the customers and the cashflows are very different to conventional mortgages. Equity release loans are usually at a fixed rate, LTV ratios are lower than for homebuyer loans and there is no requirement to make regular capital repayments so no risk of default.
Competition in the equity release market depends on the participation of a range of financial institutions but there are good reasons to encourage life insurance companies to participate because of their mortality expertise, a key component of equity release pricing. Investing in equity release assets is also positive for the financial strength of the insurance sector because it can help increase diversification while securing long-term, stable cash flows.
The numbers of over-65s in Europe is expected to double between 2010 and 2030 and the ratio of older people to those of working age will rise from 28 per cent to 42 per cent. Governments and employers are urging people to take more financial responsibility for their old age, but that will not help those already in the run-up to retirement who will not be able to make up for lost time. No one is pretending equity release alone can solve the problem caused by the European pensions gap. But if embraced as one part of a wider solution, it has the potential to lift the living standards of many millions.
This article was first published in Mortgage Strategy on 1st June 2013, and updated 27th June. It was written by Stephen Lowe, group external affairs director at Just Retirement.
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