Equity release has become the go-to pension alternative for the retirement market, with UK daytime television full of adverts from firms offering products and services in the space.
Many retirees are turning to the sector in a bid to boost their pension pots.
Types of equity release products include lifetime mortgages and home reversions.
Investment firm AJ Bell found, since the launch of pension freedoms in April 2015, homeowners have used property wealth to deliver £13bn ($16.9bn, €15.2bn) in extra income via equity release.
Senior analyst Tom Selby said: “For every £1 of money flexibly withdrawn from pensions in the last four and a half years, about £0.44 has been generated from property wealth using equity release.
“This emphasises the multi-faceted nature of retirement planning for most people, with private and state pensions often combining with equity release and other financial products like Isas to deliver an income.”
Regulatory review
This surge in interest for equity release products has sparked the Financial Conduct Authority (FCA) into action.
The UK watchdog confirmed it has been engaging with firms to help it better understand the market to reduce any potential harms.
But will the review mean the end of equity release in the retirement market?
Keith Richards, chief executive of the Personal Finance Society, said to International Adviser: “With people living longer and ongoing uncertainty about funding for long-term care, it is not surprising that equity release is becoming a major part of many families’ financial planning.
“It is crucial that consumers have access to high-quality advice in this market, and we welcome the FCA’s study.
“Collectively, we must expand the volume of advice available in this market without compromising quality.”
Evolving market
Over-55s specialist advice firm Key recently announced the total value of wealth released from property in 2019 fell by 4% to £3.4bn.
Also, the number of new plans taken out decreased 3% to 45,598 from 47,081 in 2018.
But, despite these reductions, membership of the Equity Release Council has increased by 97% in the last two years, with the total number of firms increasing to 431 from 219, which includes IFA network Openwork.
“Equity release is among the UK’s most highly-regulated financial services products, through robust industry standards since 1991 and formal regulation since the mid-2000s,” Jim Boyd, chief executive of the Equity Release Council, told IA.
“Recent growth from a low base has established equity release as part of mainstream financial planning conversations, as part of a wider increase in later life lending to older consumers.
“This is the logical result of an ageing population looking to use one of its main sources of wealth – money invested in property – to meet increasing financial and social needs; including boosting retirement income, meeting unexpected expenses, consolidating debt, funding care at home and providing a ‘living inheritance’ to younger generations.
“We welcome the FCA’s exploratory work into lending in later life and look forward to maintaining our close dialogue with the regulator as the market continues to evolve.”
Fast-developing sector
Steve Wilkie, managing director of retirement mortgage provider Responsible Life, told IA: “The later life lending market is already heavily regulated, but an exploratory review by the FCA must be welcomed to gather the views of the industry stakeholders and look at customer outcomes.
“There is no doubt that the market has undergone significant change in recent years. New products have been launched, and rates cut, which in turn has drawn an increasing number of customers to this option of financial planning.
“Rightfully, the FCA is keeping on top of what has been a fast-developing sector through its review.”
Alice Watson, head of marketing of insurance at Canada Life, said to IA: “Offering consumers certainty and flexibility is paramount to the growing demand for equity release and lifetime mortgage products.
“Strong consumer safeguards and the requirement for face-to-face independent legal advice have reassured many homeowners that equity release is a viable way to access their wealth.”
