Equity release - an integral feature in a retirement account Whitepaper An examination of how equity release will be used in retirement planning
Contents 3 Synopsis 4 A holistic retirement proposition 5 Equity release 6 Can the market deliver? 7 Looking ahead 2
Synopsis The use of property wealth as an integral element of retirement income planning is more relevant today than ever. The equity release market is set for significant growth within the context of an integrated retirement proposition. There are significant challenges in developing a holistic retirement market, in terms of both advice provision and technology support. Providers that can offer a complete retirement platform have the best opportunity to win the battle for later-life customers. 3
A holistic retirement proposition Looking back, in October 2005 the actuarial profession ran its first competition on defined contribution decumulation, as part of its initiative on thought leadership in the UK pensions market. The following was one of the leading proposals 1 : The retirement wrap One of the most popular recommendations was predicated on the market s willingness to break down the artificial product boundaries that currently apply to sourcing income. The wrap would provide a single platform for all retirement income needs and as an integrated product it would provide consolidated statements, enabling pensioners to see all of their main retirement financial arrangements in one place. The wrap would include: A portfolio of annuities, including the new money-back product, impaired life and enhanced life, and long-term care versions. A deposit account with a loan facility to enable a co-ordinated approach to debt and savings. The overdraft facility for emergency funds would offer a competitive rate broadly equal to the gilt yield rate, as it would be secured against future annuity payments. A property account for full sale or equity release. Adding the property value to the wrap increases the overall fund size significantly. In the world of pensions freedom, this proposal seems even more relevant today than it did a decade ago. Many traditional pension providers, wealth platforms and adviser groups are developing their versions of retirement accounts, aiming to win the customer and keep them through their later-life years. A drawdown fund to be used for capital above what is needed to provide a minimum income. 1 The Actuary 4
Equity release Perhaps the area set for greatest change is equity release. Once a niche product used mainly in later life to help with care costs, the market is set for significant growth. Mintel predicts new UK equity release advances will increase from the current 1.4 billion per annum to over 2.3 billion in 2019 2, while Legal and General suggests the levels of equity release lending are still a drop in the ocean given the potential, and the market could grow to 5 billion 3. Rather than accessing pension pots, we might even see the concept of the much-heralded retirement bank account delivered using housing wealth with easy access to cash and no tax complications on withdrawals! 2 Mintel.com equity release schemes UK May 2015 3 Legal & General with CEBR, Last Time Buyers Report, June 2015 4 FCA (Thematic Review, May 2015) estimated 260,000 interest-only mortgages with no repayment strategy in place. Many factors are combining to increase demand: The pension freedoms themselves, where changed tax treatments to pension funds will push some to preserve their pension for family inheritance and use housing equity instead for income The expectation that easier access to pensions cash will cause some people to run short of later-life income A reduced lifetime allowance, limiting the level of tax-efficient pension pots House price growth currently exceeding average pension fund growth, increasing the relative size of housing wealth The huge number of interest-only mortgages reaching their end of term 4, where the consumer has no means to repay the capital and the equity release product offers the option to extend into a lifetime mortgage, perhaps with partial repayments 5
Can the market deliver? There are some big challenges ahead, though. Provider coverage is patchy in terms of offering a complete retirement account. There are some that do offer all retirement products and have been long-standing players in savings, annuities and equity release. We are seeing others joining that mix. L&G has returned to equity release, while retirement specialists such as Retirement Advantage and Just Retirement have extended their range into equity release and drawdown respectively. Aquila Heywood s view is that more players will join them with a complete savings, drawdown, annuity and equity release proposition within an overall retirement account. The advice market is polarised, with few IFAs offering holistic coverage from a single adviser. Today, many consumers will need to speak to one adviser about their savings and another about their retirement income and a different one again in respect of equity release. That has to change, with advisers becoming proficient across the full spectrum. Equally important will be the evolution of advice models to service those middlemarket consumers most impacted by pension freedoms. As outlined in our presentation Technology is key to a flexible future, delivered at Marketforce s June 2015 Future of Life & Pensions Conference, the new pensions flexibilities offer most choice to this rapidly-growing segment. Yet this same cohort is less well served in the advice context post-rdr what is commonly called the advice gap. We are already seeing the development of robo- advice solutions and better use of technology in the workplace, combined with face-to-face meetings to create affordable advice propositions. Innovation will continue in this area, and will need to address how best to engage the consumer through an extended period of time as they move gradually from work into a phased retirement, through a series of product and income choices, into their later-life years. 6
Looking ahead The holistic planning needs of the customer will create a demand for equity release to be part and parcel of modelling tools and we have yet to see that evolve and also for providers back-office technology to support efficient, digitally-enabled equity release administration alongside other retirement products. For many providers, developing an efficient platform to manage this integrated retirement account is a further huge challenge that will need to be addressed. At Aquila Heywood, we re betting the winners will be those providers that simplify their heritage estates and adopt a single retirement platform solution that spans the full savings and income product selection, including equity release; one that enables streamlined, transactional integration to specialist advice and modelling solutions. That is where we are taking our solutions! For more information, contact us or visit our website. 7