Equity release is a product that for years has promised a resurgence that has never come. Could the pension freedoms bring about the seismic shift it needs to become a viable retirement planning alternative?
Tougher rules for mortgage lending, as a result of the Mortgage Market Review that came into force in April 2014, could make it harder for existing homeowners to remortgage, pushing them towards alternative ways to cash in on their property.
Equity release products allow the homeowner to sell a share in their house or take out a lifetime mortgage against it, without the risk of losing the house before they die.
No longer a last resort
The pension reforms could be a driver for equity release.
We do not know the extent to which retirees will draw down their pension cash after 6 April, but the sheer increase in people withdrawing investment pots rather than annuitising is likely to result in funds running down sooner. There is an estimated £5.5 billion in housing wealth owned by the current retiring population.
Consider also that the cut in the 55% tax on passing on unused pension funds after death could result in more people looking for alternatives to pension withdrawal.
‘If they had an IHT problem on their estate, people would draw from their pension funds,’ says Simon Chalk, technical manager of equity release at Age Partnership. ‘Now they can pass on a pension IHT-free, the idea of taking money from a house changes from being a last resort to becoming a second resort.’
Providers are preparing
Providers seem to think there is going to be an upsurge in equity release. Legal & General entered the equity release market in February by acquiring equity release provider Newlife.
In fact it is already happening. According to the Equity Release Council, 2014 was the biggest ever year of lending, with £1.4 billion of equity release policies written. This was a 29% increase on 2013.
This represents a turnaround. Equity release providers have historically relied on annuity providers that used the policies to fund liabilities and the 2014 Budget threatened to destroy the annuity market. Chalk says asset managers are investing in equity release policies to provide a low-volatility fixed return, which means supply should continue to meet demand for the time being.
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