A couple of weeks ago I chaired an Altus event called Learning to ski, lifetime mortgages and other ways to spend the kids’ inheritance. It looked at the fact that contrary to popular opinion, many babyboomers have a retirement funding gap.
I know a bit about platforms and the fund industry, but I confess to knowing very little about lifetime mortgages or equity release. That’s probably because when I started my career, equity release products had a pretty bad reputation.
Horror stories about people taking out equity release products only to lose everything but the clothes on their backs were not uncommon (the Daily Mail and the Express were chock-full of them), so it’s no surprise that large swathes of the advice industry have steered clear of the product.
But should they be steering clear and is the bad reputation still deserved today? Over the last 20 or so years, the equity release industry has grown up and cleaned up its act. And it’s done so just in time as the numbers of people who are retiring with a retirement funding gap is growing — especially among babyboomers.
Advice and planning for retirement has always focused on traditional pensions and investment wrappers, and yet the savings rate remains stubbornly low. Which is a problem. Lifetime mortgages aren’t quite mainstream yet, but they should be as they’re a very handy tool in the adviser’s toolkit to help clients maintain living standards in retirement.
At the beginning of May the FCA published a discussion paper on Intergenerational differences and the changing financial needs of consumers from different age groups. The paper recognises that what we need and expect from financial services changes over time. For example, our pension needs will differ from our parents’ pension needs.
Changing financial needs are nothing new, but what are new are the deepening differences between the generations and the choices they must make as a result of those changes and differences.
The regulator found that wealth patterns have changed considerably in the last decade and the three generations under consideration in its paper (Babyboomers, Generation X and Millennials) will face very different challenges as a result of their current stages in life and the cumulative effects of strikingly different economic circumstances. Click here for the FCA’s discussion paper.
Busting the babyboomer myth
Everyone assumes that babyboomers have it all. That they’re well off because they benefited from both rapidly rising house prices and defined benefit pensions. In fact a substantial number of babyboomers approach retirement with mortgage and credit card debt and no strategy for paying it off. In addition, around half have not given any thought to how they’ll manage in later life.
Funding later-life and/or end-of-life care will be a future financial uncertainty that is made worse by rising longevity (the fact that most of us will be barmy but live a lot longer has serious implications for our retirement savings).
Pension freedoms have also been a factor. With annuities no longer mandatory, most retirees have opted to withdraw cash and/or opt for income drawdown. As a result, annuity sales are just a fifth of what they used to be and far fewer people are using their pension pots to buy a guaranteed income.
This also means that they risk running out of money and/or being at the mercy of changing asset values, which is why they’re turning to equity withdrawal and products such as lifetime mortgages. According to the FCA ‘the need for more personalised later life lending products or other relevant products is likely to grow’.
Filling the funding gap
In his presentation Filling the Retirement Funding Gap, Jon Dean, Head of Retirement Strategy at Altus, confirms the FCA’s view that the babyboomer generation is the least prepared for retirement. Interestingly, of the three generations covered by the FCA’s discussion paper, millennials will be the most prepared (mainly because of auto-enrolment) — their problems are more immediate owing to a lack of affordable housing and student debt.
It’s dangerous to assume that the number of babybusters is relatively small. There are 17m people aged between 55 and 64 in the UK. Around 80% of them expect to live more than 20 years in retirement (if they retire at 65) so a life expectancy of 85+ years. A whopping 95% of DC savers in this group have inadequate savings ie they will not meet their government-recommended target replacement rate of 50-75% of working age income.
In addition, 1.6 million people (a tenth of all babyboomers) will not achieve the Joseph Rowntree Foundation minimum income standard of £9,154 a year outside London and £19,466 a year in central London. The savings shortfall is £1.6trn. (The Altus white paper is full of other interesting and scary facts on the pension savings gap).
It’s on the house
Housing wealth may be the only option available to babyboomers to fill the retirement savings gap. Housing wealth net of mortgage debt in the UK for this cohort is £4.6trn, which means that once the savings shortfall has been taken care of, there is £2.8trn in housing equity among the over 50s. Three quarters of 55-64 year olds have net property wealth of more than £50,000 and the rest have net property wealth of more than £250,000.
To quote Jon Dean, ‘property is not a silver bullet for the savings shortfall, but equity release could make a real difference to many’.
Download all the Altus seminar presentations here.
Download the Altus white paper here.
Credits: Babyboomer picture by Monkey Business Pictures on Shutterstock. Grandad picture by bbernard on Shutterstock. House picture by Travel-Cents on unsplash.