Why people turn to equity release for retirement income

The decision to put money into property as opposed to a pension plan is a contentious issue, and the pros and cons of both approaches have been long-debated. 

I think some people are very attached to their house, and equity release is an alternative to downsizing

Michelle Cracknell, The Pensions Advisory Service

Investing in real estate, or simply downsizing around retirement age, are all property-related alternatives to saving into a pension. But opting for equity release to make ends meet once one’s working days are over is a particularly moot point. 

The Money Advice Service points out that opting for equity release means people might not be able to rely on their property for money they need later in retirement, and there are also costs involved.

The rise of equity release

The process, which enables someone to access the cash tied up in their home if they are over the age of 55, has increased in popularity nonetheless. Over 8,000 equity release plans were agreed in the second quarter of 2017, up by 27 per cent since the same time last year, according to the Equity Release Council.

With the demise of defined benefit pensions, and increased life expectancy reflected in the government's announcement to raise the state pension age to 68 from 2037, is releasing equity from property likely to be the only answer for some people?

Michelle Cracknell, chief executive at The Pensions Advisory Service, pointed out that “the requirement to make proper provisions for your retirement is falling very much on the individuals” and some need to use their house “as part of a way of funding what is becoming an increasingly more expensive retirement”.

Nigel Waterson, chairman of the Equity Release Council, highlighted that generations that have not benefited from DB pensions but lack sufficient levels of DC saving, “are going to have a gap to fill at retirement”.

Property is the most widely held asset, with 17.1 million owner-occupiers in the UK compared with 10.3 million employees with pensions, according to an Equity Release Council research paper published in April.

However, some savers are still averse to the idea. Rob Thomas, director of research at Instinctif Partners, pointed out in the research paper that “the greatest obstacle to the growth of equity release in the UK has been psychological”.

There is a cultural tendency for people to see homes as the main asset to leave to the next generation, but in the post-pension freedoms era “these distinctions should, logically, start to fall away”, Thomas added.

Cracknell also noted that people are often averse to equity release because it eats into the inheritance pot.

She added that in the past “there were some pretty bad equity release schemes” and it is still “seen by quite a lot of people outside the financial services industry as a toxic product, despite the fact that there have been huge reforms and changes to the products that are currently on the market".

Employment history plays a part

Downsizing is also an option for people wanting to use property to fund their retirement, but some people prefer the fact that equity release enables them to stay living in their family home.

“I think some people are very attached to their house, and equity release is an alternative to downsizing,” Cracknell said, cautioning that there is a risk of people having a limited understanding of equity release products.

Waterson said that equity release often “appeals to people who are under some financial pressure”, using it to pay off debts or for make up for low pension income.

Susan Hill, chartered financial planner at Susan Hill Financial Planning, said the way in which some people rely on equity release to fund retirement is concerning.

Many of "those who are taking equity release... don’t have the benefit of a monthly regular income of a DB scheme… therefore they have to fall back on property,” she said.

Hill says that she is concerned that “equity release might be used more often” in the future because of this demise of DB. She highlighted that it is also very much “a past employment issue”, where the “self-employed haven’t been able to make enough provision” due to the absence of an occupational pension fund.

There is too much emphasis on the fact that older generations are taking out equity release, and there needs to be more of focus on how employment history impacts these trends, she added.