Home is where the wealth is
This article was originally commissioned for the March 2019 edition of the Investment Life & Pensions Moneyfacts Magazine. Tom Murray argues that a vibrant equity release market will be vital in helping the elderly to access the level of care they need.
One of the biggest issues faced by the UK is the difficulty people have in maintaining their lifestyles in retirement when the majority of their wealth is tied up in bricks and mortar. How to provide decent pensions and social care for the elderly, when many of them are asset rich and cash poor is a fundamental problem facing our society, along with most societies in the western world. For the provision of care to the elderly is spectacularly expensive; average home care costs are £30,000 p.a., £40,000 if nursing care is required.
As the proportion of the UKs population over the age of 65 grows, it’s likely to put a huge strain on the government’s finances as they struggle to cover the cost. It’s a huge problem, but the solution lies in the fact that many of the elderly are asset rich, given the appreciation in house prices over the last thirty years. Meanwhile, the number of pensioners in poverty is increasing and the cost of care, both at home and in a nursing home, is escalating. The result is that many pensioners do not have sufficient savings to fall back on if either they or their partner requires care.
The government was prepared to think the “unthinkable” in 2017 and proposed during the election campaign to step into the breach by increasing the provision of social care, funding it by recouping the majority of it from the estate after the person requiring care had passed on. The policy proposal promised not to sell the family home to recoup the money until both the person and their partner had passed on. Even so, the extremely negative public reaction proved just how “unthinkable” that idea was and resulted in the immediate dropping of the media-named “Dementia Tax” from the Conservatives manifesto. Given the severity of the public’s response to the initiative, it will likely be a long time before any political party treads that path again.
Public problem, private solutions
But if the Government is prohibited from stepping in with a pooled approach, what can the private sector do in this area to help alleviate the problem by covering the cost of elderly people in retirement.
Obviously, in the field of pensions, the private sector is doing tremendous work. The UK is renowned for having one of the world’s best private pension systems which is highly innovative in the area of product development. The success of auto-enrolment has dramatically increased the breadth of coverage and, as the contribution levels are stepped up, the depth of the coverage will also increase. Thus, alongside the state pension, there is good provision for private pensions to top-up day-to-day living in the UK and it is getting better all the time.
However, despite the reasonably high number of people in receipt of some level of private top-up to their state pension, the fact still remains that pension levels that are more than adequate when it comes to daily living are completely inadequate if the individual, or his/her partner, starts to need care. This is irrespective of whether that care is required to enable the individual to maintain independent living in their own home, or whether it is required for residential care, as both forms are hugely expensive for those on the average retirement income.
Pooling for care
The NHS is Britain’s best example of how a social need can be fulfilled by pooling the risk across the entire population successfully, and there are many advocates of a similar system for the issue of the provision of elderly care. Nevertheless, while the political climate is not particularly supportive of a solution along these lines, a private sector solution is required.
Long-term care plans have been around for a long time, whereby the risk of needing care support is pooled across all the participants in the scheme. The problem is that, given the fact that most people don’t face the reality of a possible need for care until the later stages of their working life, the average age of those taking out the plans is quite high. As a result, these plans tend to be very expensive, and therefore the take-up has been relatively low in comparison to the level of need across the population. Thus, whilst they are useful, they do not form a major part of the solution to deal with the cost of care bubble that is currently blowing up.
The other option to help people access the level of care they need, is to enable those who have assets to tap into them to cover the cost. However, the primary asset held by the majority of elderly people is their home. Enter Equity Release, an approach that enables people who are asset rich but have a low income to tap into their wealth, either for a lump sum for major issues or to get an income stream which will provide for them throughout their life.
The popularity of equity release products has been growing dramatically over the last few years, albeit from a very low base. 2018 marked a record year, with a twenty-five per cent increase over 2017 to 46,397 new plans unlocking almost £4 billion of housing wealth. This has been driven by an increasing number of players in the market, and plenty of innovation in the product range with the number of products available across the UK now 139, compared to only 24 in 2007.
It is interesting that the amounts being drawn down however are remaining steady, with average drawdown lifetime mortgages hovering around £60K for the first instalment and lump-sum lifetime mortgages holding at an average of c. £100K. Combined with the fact that two thirds of the lifetime mortgages taken out in 2018 were drawdown, it seems to show that people taking out these plans are aware of the issues involved in looking after their financial needs and are conscious of the need not to blow their primary asset in one go.
“An Englishman’s home…”
Whilst the number of people taking out equity release plans is increasing steadily, it is still a very small part of the market and there is a huge potential for it to grow. It has been held back because there are a couple of barriers to the expansion of this market that are far more behavioural than rational. If we could tackle these, we would be in a better position to grow the equity release market, with the consequent improvement of the situation for the elderly in the UK.
One of the issues around the development of this market remains the fact that people are fixated upon the security that owning their own home gives them. This is understandable when one realises that one of the most stressful things most people can imagine is foreclosure on a mortgage that results in them losing their home and possibly becoming homeless. There is an attitude that once you own your own home, you are untouchable, protected from the vicissitudes of life. Contrariwise, there is a feeling that if you were to lose your home, it would render you extremely vulnerable, a position that the elderly would fear more than younger people.
It is therefore difficult to get across to people that an equity release plan is not putting them in any danger of losing their home whilst they are still alive. If it even appears to be slightly at risk, there can be no hope of the pensioner tapping into this wealth, and therefore it is key to get across to the individuals concerned that with equity release, they are just as secure as they were prior to taking the plan out; they are guaranteed to be able to live in the house for their lifetime, which is all that outright ownership gives you.
However, the biggest issue that remains is the determination of people to pass on the wealth gained in their house to their heirs and not seeing it as merely an asset. This fixation with the ‘family home’ as the primary asset is getting in the way of the expansion of the equity release market.
Getting people to alter their view is a difficult move but one that is urgently needed. Why should there be any difference between people putting their money into a fixed asset such as a house compared with those putting their money into an equity fund? And yet, no one expects those with a large amount of money in funds to be helped out socially so that they can pass on their wealth to the next generation.
People need to think differently about their house. Just as they accumulate a large sum in their pension fund during their working years and then draw it down during their retirement, similarly the wealth in their house should be seen in the same way. An asset that was built up during their career to be drawn down upon during their retirement, and thereby providing them with some means to access the care that they may require during that final life stage.
Unless we can get people thinking differently about the value in their house, this ludicrous situation will persist whereby many pensioners are living in absolute poverty in a financial asset that it has taken most of their life’s savings to acquire. But changing people’s attitudes is not easy. It will take the combined efforts of the industry and the Government in order to bring about change.
Changing how people view things is difficult but it can be done. Society’s view on many topics has changed dramatically over the last five decades. Just watching television shows from the 60s or 70s shows how much social attitudes to so many issues, such as smoking, drinking, gender-stereotyping has changed. But the lead needs to come from the top.
If financial advice and reporting were to focus less on inheritance and more on how houses were bricks and mortar investments, to be built up during ones working life and drawn down on when needed in retirement, slowly the attitude could be changed. More publicity for equity release would reduce fears, once it became common knowledge that there are options to ensure the plan holders would never be in danger of losing access to their home during their lifetime or their partners. But the process of changing people’s attitudes is a long-term one and, as we know that there will be a huge problem in the next few decades, now is the time to start dealing with it.
For when one thinks about it, the existence of a huge funding gap for the final life stage combined with a huge locked-down asset bank, owned by the very people who are in need of the funds is slightly absurd. And a vibrant equity release market is vital to helping society meet the needs of the elderly without causing a huge problem for taxpayers as life expectancy escalates and the numbers in retirement keep growing.