Equity Release Lifetime Mortgages could Lift 1.6 Million UK Pensioners Permanently out of Poverty

by Socbot on April 17, 2013

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Struggling pensioners often find themselves asset-rich, but cash-poor – by that we mean have little by the way of income, but have a lot of wealth tied up in assets such as property. A panel of experts have launched a report in to the number of pensioners are now living in poverty and how many more pensioners are likely to see their living standards plummet in the next ten years – and the findings are shocking.

For a long time the government and policy makers have been struggling to find solutions to the aging population and shrinking retirement incomes. Final salary pension schemes are significantly less than previous years and many employers have stopped the most generous pension savings schemes. Which means most workers should now expect to retire on substantially less income than previous years.

The rising cost of living is also playing a detrimental role in the living standards of our pensions; as incomes deteriorate and the cost of living rises – adding tremendous pressure on their modest budgets. All too often these living standards are compromised, and our retirees slip further and further in to poverty. What makes this situation even more frustrating is the fact many of these pensioners are living in property worth tens of thousands, hundreds of thousands, or even millions – yet they still find themselves choosing between heating or eating.

Equity release has played its part in relieving some of these pensions, but with less than 17,000 households using equity release in 2011, it by no means compares to the 1.6 million pensions living below the poverty line.

Why isn’t equity release more wide spread with pensioners?

The reason most experts believe equity release has not been taken up in a larger scale is because most pensioners are either unaware of equity release, or have concerns about the ownership of their home. Many people wrongly believe equity release involves selling your property. This is not actually the case. The by far most popular type of equity release (lifetime equity release mortgage) a a fairly straight-forward interest only re-mortgage where the interest is rolled up (added on) to the end of the mortgage. This is frequently mixed up with a “home reversion plan” which does involve selling the property.

Compare the differences between equity release lifetime mortgages and home reversion plans here:
http://www.ascotequityrelease.co.uk/lifetime-mortgages-compare

Changing the way equity release works

Oxford Economics who carried out the research noted that many of the current equity release products could be improved by changing the way the cash is paid out, recommending that rather than a large initial lump sum payment, that the “equity” should be paid out as regular instalments. Whilst this is already the case in a number of equity release products, it is still usual to take one large initial payment (which could be as much as 90% of the total amount to be released!)

The downside to the way equity release is loaded means that once the equity is released, then the interest is chargeable on this amount (so the more you release initially, the higher the interest charges will be). If the equity release scheme was to allow equity to be draw down in smaller chunks over a longer period of time, it would effectively leave more equity in the property for longer (limiting the amount of cash withdrawn would limit the overall amount of interest charged).

Baroness Sally Greengross, a former director of Age Concern (UK) believes a change in attitudes is needed, and that people need educating about just how much money they need in retirement. Whilst Theresa Fritz at the Financial Services Consumer Panel says that for equity release to be taken up on a wider scale then they need to realign the annual interest rates with current market trends, saying that the industry needs to come forward with better value products.

http://www.ageuk.org.uk/money-matters/income-and-tax/equity-release/

There is also a mind-set issue to overcome. For a lot of pensioners, they have been paying off their mortgage over much of their working life, usually over 25 to 30 years, and now own their property outright. For them to re-mortgage with an equity release product, they often feel as though this would be un-doing all their hard work. They are also often worried about the social stigma associated with releasing equity, but the truth is not many people use these products to splash out on a holiday of a lifetime, luxuries or frivolities,  the money is more often used simply to easy the strain on day to day essential financials.

 

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