Home and pension is one asset pool
Georgina Smith is managing director of Stonehaven
In the 2014 Budget, the Chancellor announced that retirees will be able to withdraw their entire pension pot in cash.
This will clearly have an impact on retirement planning, in particular, it will compel people to take a more elastic – and strategic – view of managing their finances.
Their pool of money will need to be managed to provide income for active old age and also care and health requirements for their older age. Having a future free from money worries will be a challenge for many, making the asset pool stretch to cover these needs, will be increasingly vital.
Recent research from Partnership indicates that a high percentage of people want to manage their pension pot to ensure that they can have an income in retirement.
Some 43% of people favoured keeping their money secure by either investing in a savings bond or similar product and 36% said they would put it in the bank, which highlights that those who have saved during their working lives will try to protect their money in the interim period.
However, in a climate where people are living longer and pension savings will not always be sufficient, equity release will have a bigger role to play.
Financial advisers as a minimum should be including the home in all retirement planning, as it is usually a person’s largest asset and in many cases it will be necessary to help provide comfort in old age.
Lifetime mortgages will still provide a sensible solution for those who have already retired and are unaffected by the recent legislative changes. We know that four in 10 of our customers use a lifetime mortgage to clear an existing interest-only mortgage, and more and more are using it for gifting to children, home improvements and consolidating unsecured debt. This demand is unlikely to change.
We believe that a lifetime mortgage will also be a sensible solution for those who have a pension pot of £30,000 or less, although they may delay their decision to take a lifetime mortgage for a few years.
For people with a pension pot of this size, there may be more temptation to use it for day to day living or luxury products. Recent research from Partnership highlights that 14% of people would use the money to have a good time, saying they would spend the cash on holidays, cars or other luxuries. For these people, their home may end up being their only asset to provide them with both income and protection.
Similarly, research from Aviva shows that 14% of over-55s are concerned about having enough money to cover their immediate living costs and those of their spouse.
Where a pension pot is available, people may choose to use it to supplement their day to day living, eroding their ability to use it as a vehicle for future income. In circumstances such as this, it may be that their home needs to be used to secure longer-term financial security in retirement.
While retirees under the new regime are unlikely to be buying Lamborghinis in reference to comments made by a government minister, advisers need to prioritise equity release as a financial planning tool to support the aspirations and requirements of people living longer within this pensions revolution.
A good equity release product will allow a pensioner to remain in their home and ring-fence an inheritance for their heirs.
The Chancellor has created a dynamic savings revolution and equity release will play an important role in those changes, providing increased financial security for a growing sector of older people who will reap the benefit and comfort by maximising all of their assets.