"If low interest rates and increased inflationary pressures on pensioner household income put pensioners’ budgets under financial strain, the traditional reasons for using equity release will increase."
Many within our sector – equity release/the later life market – have been asking what Brexit will mean for advisers, providers and customers - indeed for all stakeholders. The immediate impact comes of course with the recent cut made in August by the MPC to Bank Base Rate, and the subsequent effect this generates, plus of course the continued speculation that this may not be the last cut this year.
For those in, or near retirement, falling interest rates clearly have an impact on annuity rates (down 12% since the beginning of the year) and other sources of guaranteed income making these products ‘more expensive’. We also often hear about prolonged low interest rates hitting savers. Many of these savers are pensioners and those who depend upon bank/building society interest for part of their income are going to continue to suffer – indeed they have been suffering for some time.
Reduced interest rates could also lead to a further reduction in interest on equity release advances. Also many institutions are looking for investments that give returns while matching their longevity liabilities. This could lead to further funding for equity release becoming available creating further downward pressure on rates.
In terms of income drawdown there have probably been winners and losers depending upon where their drawdown fund has been invested. Those who are the unfortunate losers should be cautious about drawing more out of their pension fund at this time and what assets they use to draw income out. Making the wrong decisions could lead to their funds depleting far more quickly than originally envisaged. This is not just today’s problem - increased volatility could make today’s winners tomorrow’s losers so drawdown investors need to monitor carefully their portfolios before drawing income or replenishing their cash accounts for the next period’s income.
Since the EU referendum vote result we have clearly seen an impact on sterling’s value - if the resulting fall in sterling results in imported inflation, for example, on food and energy costs these could have a disproportionate impact on those who have retired. There are reports that inflation could soon be around 2.5% or more. What is important is the inflation rate for the goods and services the individual consumes. While the state pension is inflation-proofed, level annuities and interest bearing accounts are not. Therefore pensioners could end up facing problems in making ends meet.
In terms of the housing market, there is anecdotal evidence that the number of properties available for sale is reducing post-EU vote. If this is correct then available properties for downsizing may become restricted. As downsizing is an alternative to equity release, particularly if the need is to release capital, then more people may find equity release is the only practical solution available to them.
The fallout from Brexit could therefore be beneficial for the equity release market for the following five reasons:
- If the guaranteed products individuals buy at retirement become more expensive then they should consider other options. Equity Release with its product guarantees may be an option that is considered in the early years of retirement;
- Equity release rates are already very cheap with many sub-5% products on offer. Further reductions in rates and a potential increase in the availability of funds will lead to greater competition.
- If it is inadvisable to draw income or to replenish a cash account from a drawdown fund that has been hit by the Brexit fall-out, or subsequent volatility, it could be advisable to take advantage of low equity release rates to ride out the storm.
- If low interest rates and increased inflationary pressures on pensioner household income put pensioners’ budgets under financial strain, the traditional reasons for using equity release will increase.
- A reduction in available properties for those who would otherwise downsize may mean homeowners opt to utilise equity release rather than moving home.
It is of course still way too early to say just how the move to Brexit, and beyond, will impact on our sector and the greater economy as a whole. I prefer to focus on the positives however one has to anticipate that there will be some considerable bumps along the road and the journey will need to be approached cautiously.
