As in most of the developed world, the United Kingdom is bracing itself for the slow squeeze of ageing on its economy. Even after accounting for future rises to the state pension age, the Office for National Statistics has projected the old-age dependency ratio to fall by 15.6% within twenty years. This means that there will be fewer workers to pay for a much larger state pension bill, which the Government expects to cost £142 billion in 2030, and the National Health Service will similarly be stretched. This is not yet an emergency, but it will be an important challenge to minimise the negative impact of ageing on economic growth and productivity.
Among developed countries, Britain experienced especially rapid and sustained growth in housing prices since the 1990s until 2008. Those who benefited from the housing boom are now mostly either of the state pension age, or will reach the state pension age in the coming two decades. Research carried out for the Financial Times last year found that homeowners aged over 65 hold nearly £1 trillion of housing equity, much of which is mortgage free. Yet government figures show that around 20% of pensioners are in material deprivation or living on a low income. House price increases do not guarantee an income or minimum standard of living to older people, especially as they are often reluctant to sell their properties and downsize.
But with equity release arrangements, housing wealth may in fact present a valuable opportunity to help with the increasing costs of an ageing population. These products allow asset-rich, income-poor homeowners to release money from the value of their home while living in it. This money is paid back after the homeowner’s death or if the house is sold. The average borrowing rates for equity release have fallen to 6.06%, while property prices increased by 5.1% in the last year. However, there is little uptake of equity release products by pensioners – in 2013, Oxford Economics estimated that around 28,000 pensioners benefited from equity release, only 0.2% of the total number of pensioners. What’s holding back the equity release market?
Pensioners are currently unlikely to release equity from their homes for several reasons, even those who have a low income, considerable housing equity and are unwilling to downsize. On the one hand, guidance on equity release can be difficult to find for the elderly. There is both a lack of awareness and trust for unfamiliar financial products, and a widespread assumption that they are not good value for money – especially as releasing equity could lose low-income pensioners means-tested benefits. On the supply side, the biggest high street banks exited the market after the financial crisis and have been reluctant to re-enter, perhaps fearing the bad publicity caused by other lenders. This has meant that equity release deals are less widely available, less advertised and less competitive.
There are good reasons to remove these barriers where possible. Apart from easing the financial burden on the taxpayer and improving the living standards of elderly homeowners, unlocking capital in this way is also likely to help the wider economy by boosting consumer spending. Benefit entitlements should not act as a direct disincentive to draw from one’s own assets, and moderate equity release should not affect means-tested benefits. Clearer case-by-case guidance on the suitability of equity release is needed from local authorities, the Pensions Advisory Service, volunteer advice services and the private sector to allow pensioners to make an informed choice. Once pensioners begin to feel that it is safe and represents good value for money, high street retail banks may be tempted to re-enter the market, lowering the cost of equity release and raising its mainstream appeal.