New macroeconomic research reveals huge potential of equity release to help poorer pensioners
Equity release is set to play a key role in raising the incomes of many of Britain’s poorer pensioner households, lifting more than a million out of poverty for a year between 2012 and 2040.
Millions more could benefit from evolution of today’s market including the introduction of new drawdown plans specifically designed to help income-strapped pensioners and a more proactive stance towards equity release
from government that needs affordable ways to fight pensioner poverty.
The independent research carried out by Oxford Economics for specialist insurer Just Retirement looks at the impact of equity release on pensioner poverty and the wider UK economy in terms of GDP, jobs and tax
Around one in every seven pensioners has a disposable income of less than 60 per cent of median household income, the ‘relative poverty’ threshold defined by the Department of Work and Pensions. That is 1.7 million pensioners overall, of whom 60 per cent own their own homes outright. Of the very worst off pensioners, the 0.8 million classified by the DWP as suffering ‘material deprivation’, 38 per cent own their properties outright.
“The squeeze on pensioner income is very real and only likely to tighten in the coming decades as defined benefit schemes are replaced by less generous pensions and the state is forced to focus its limited resources
on those who need it most,” said Stephen Lowe, group external affairs and customer insight director at JustRetirement.
“But many of those approaching and in retirement with inadequate pensions and few other sources of income do own their own properties and have significant wealth locked up in bricks and mortar. This research uses
economic modelling to try to quantify the benefits that tapping into some of that wealth might bring.”
The research is a follow-up to a study by Just Retirement in 2012, the largest of its kind into consumer attitudes towards housing equity withdrawal, that demonstrated that retirees are becoming less willing to
sacrifice their living standards in retirement just to safeguard the value of the home for inheritance.
For the latest research, Oxford Economics used sales data from Just Retirement, the second largest UK provider of equity release with over 30 per cent of the market in 2012, and concluded that using current projections of market growth about 1,090,000 pensioner households could be lifted out of relative poverty for a year between 2012 and 2040.
Equity release is a relatively new product and in recent years, there has been increasing shift towards plans that allow homeowners to set up a cash reserve and draw down money at regular intervals rather than having
to take a lump sum up front. About 80 per cent of Just Retirement’s sales are now drawdown plans.
The research also looked at a notional drawdown plan aimed specifically at giving a longer-term income boost by allowing pensioners to extract £5,000 a year for 12 years. The results were dramatic, potentially lifting between 3.8 million and 22.8 million pensioner households out of poverty for a year between 2012 and 2040.
It concludes that the economic benefits would be real but modest, at the most optimistic a gain of 0.2 per cent in GDP by 2040 and around 22,000 new jobs.
“Even if the idea of a savings culture does take root in the UK, it will take decades for the benefits to start flowing through,” said Stephen Lowe. “In the meantime the government needs practical, affordable ways to fill the gap.
“We know from our earlier study that those approaching retirement estimate their likely income in retirement will be about £7,000 a year higher than the recently retired have received. The same survey found a lack of
awareness of other costs of later life such as long-term care and poor understanding of how those costs will be shared between individual and state.
“Consumers are looking to the government for greater clarity and they are also seeking reassurance that equity release is a safe, well-regulated product that might legitimately be considered in the planning of