The UK is sleepwalking into a retirement income crisis that cannot be averted by pensions alone.
Research from the Equity Release Council shows that the shift towards defined contribution schemes – and away from generous final salary schemes – means millions of workers will run out of money in retirement.
Those contributing eight per cent into defined contribution schemes throughout their working life will end up with just one fifth of the pension of an identical worker in a defined benefit scheme.
While this eight per cent contribution would lead to an average worker accumulating a sizeable pot of £380,000 by the time they reach retirement, this only buys an annuity of £12,000 a year at current rates. What’s more alarming is that most defined contribution savers have not saved enough to even achieve this amount.
At the same time, the value of homes owned by older Brits have increased exponentially. Total homeowner equity in England reached £2.6 trillion in 2016, of which £1.8 trillion belonged to households with a homeowner aged 55 years old or over.
Against this backdrop, equity release has become increasingly popular, and last year it was the fastest growing segment of the mortgage market in terms of customer numbers, with lending surpassing £2bn for the first time.
This year promises to be another record breaking year, with £700m lent to homeowners in the second quarter alone.
Equity release lets homeowners aged over 55 extract money from the value of their house without having to sell the property. You can either borrow against the value of your home in exchange for a lump sum or take regular “drawdown” income. The loan is typically paid back using funds from the sale of the house after the owner dies or goes into care.
Homeowners are free to use the equity they release for a variety of purposes – it can be a vital source of extra income in later life and provide a living inheritance for younger family members.
While there have been a number of changes in the sector, such as allowing customers to opt for flexible repayment, there is still a significant opportunity for equity release to play a more mainstream role in the new retirement funding landscape.
Given the huge financial challenges many savers will face in later life, government must actively acknowledge its benefits.
Policymakers and industry must continue to work together and redouble their efforts to ensure product innovation continues apace, and that the sector can meet demand from customers with a range of needs, including the ever-rising cost of care in later life.
Recent growth is only the tip of the iceberg. By building on this progress, housing wealth can help the next generation of retirees enjoy a more comfortable way of life in retirement.