Could equity release solve our retirement crisis?

The disparity between how much people are saving for retirement and how much they will actually live on is getting wider, says Claire Barker.

It is widely recognised that if current trends continue, Britain is set for a retirement crisis. According to the Office for National Statistics, 23% of the population will be over 65 by 2034, compared with 18% aged under 16.

With such an ageing population, the workforce will not be able to support those in retirement, and the government reforms on -pensions have made it clear that aside from a small state pension, people will be required to provide for their own retirement.

However, research from the Equity Release Solicitor's Alliance (ERSA) found that 47% of people are not currently saving for their retirement, and even among those who are saving, there is a large gap between how much they are saving and how much they expect to live on in retirement.

The scale of this problem may surprise people. That 47% of people are not currently saving anything for retirement is frankly worrying, and of the people that are saving, less than a third are saving more than £100 a month.
Additionally, 44% of people said that they didn't know if their ¬current retirement planning would cover their expected income in retirement and 30% said that it definitely wouldn't.

The result of this is that a significant portion of the population is approaching retirement with no retirement savings and will be relying solely on their state pension for their income, which is unlikely to be enough to live on - especially as according to ERSA's research, almost two thirds of people would like to live on more than £15,000pa.

Government reform

The main talking point in the Department for Work and Pensions' green paper on pension reform is the plan to introduce a flat-rate state pension at about £155 per week when it is introduced in 2016.

Sweeping away the complex bureaucracy of means testing will help people clarify retirement planning requirements.

Previously, many people have been unsure of how much they can expect to live on, how means-testing will affect them and whether or not separate savings would affect their means-testing.

This is to be welcomed as what will become clear to many people is that the £8,000 a year will not be enough for them to enjoy the lifestyle they would like in retirement.

Under Labour, the retirement age was projected to rise to 68 by 2046. But Iain Duncan Smith, the current Pensions Secretary, said in an interview with the Daily Mail: "The current plan to raise it to 68... we think could be accelerated. It seems silly to wait." The reality is, however, that many people expect to retire much earlier than this.

Indeed, ERSA's research found that 51% of people expect to spend more than 20 years in retirement. If they followed the rising retirement age, people would find the time they expect to spend in retirement cut short by almost a decade.

Many will choose to continue with their plans for early retirement, creating a sizeable time gap between when people retire and when they are able to draw their full pension.

Equity release

There are many ways that people can address these gaps and IFAs need to ensure they are equipped to discuss a range of retirement planning options with clients.

For younger people who can afford it alongside savings for housing deposits and mortgage payments, saving into a pension fund, if begun early enough, may be enough to fund this time gap.

However, many young people have to make the choice between saving for a house deposit or into a pension. The average age of an unassisted first-time buyer is now 38, leaving a relatively short amount of time after purchasing a first home in which to save for retirement.

For people in this situation, equity release should be one option that is discussed as it would enable them to top up their retirement income while allowing them to stay in the home they have saved for.

To meet this need, the adviser community needs to engage with clients to broach some of the misconceptions around equity release.

According to ERSA, just 5% of people were made aware of equity release by an IFA, yet 18% of people say they would definitely use it as part of their retirement planning or are likely to and 29% would consider it.

The structures of specialist expert advice must be in place before this generation of people who have a shortfall in their retirement planning reach the age at which they want to stop working.

Claire Barker is chairperson of the Equity Release Solicitors Alliance