Can equity release help financially stretched retirees?

Nearly half (46%) of people don't feel confident about their future finances – a significant increase from 35% in 2021, according to new research from the Equity Release Council (ERC).

The survey of 5,000 people highlighted that 57% of UK adults say their financial situation has got worse over the past year, with only 14% feeling that their finances have improved. 

The loss of confidence has increased markedly among older people and those in a difficult financial situation or with limited pensions may seek other ways to generate income in retirement, such as equity release.

Here, Which? digs into what's putting pressure on finances for retirees and what you need to consider before using equity release to help ease the strain.

Rising pressure on retirees

According to the ERC survey, pre-retirees are least confident with 55% of those aged 45 to 54 reporting that they're not confident about the future. 

The percentage of adults aged 55 to 64 who are lacking confidence about their future finances has also jumped significantly from 37% to 51%. 

But retirees (aged 65 to 74) have shown the largest dip in confidence as 18% lacked confidence about their future finances in 2021 – and has since risen to 39%.

The ERC study comes on the back of analysis from the Pensions and Lifetime Savings Association (PLSA) which shows that the rising cost of living and an expectation of providing further financial help to family members have pushed up the required retirement income. 

The PLSA’s ‘retirement living standard’ for a moderate standard of living for a single person has risen by £8,000 – from £23,300 to £31,300 over the past year. Those with a comfortable standard of living now spend £43,100 per year. 

More than one in three homeowners (37%) say that they've struggled to build up enough pension savings to be confident about their living standards in retirement according to the ERC research. 

Jim Boyd,  chief executive officer at the Equity Release Council, said in response to the survey: ‘Many people hope to retire debt-free with a healthy pension pot, but we must not forget the millions who can’t save or pay down their mortgages and encourage them to consider all their options including property wealth.’

How can equity release help?

Equity release is one way that you can bolster your finances in retirement if you lack the necessary savings.

A lifetime mortgage is the most popular type of equity release. You take out a loan against your property, which is repaid from the proceeds when it's sold. 

Borrowing via a lifetime mortgage can be pricey because of the way interest compounds over time. Unlike with ordinary mortgages, you don't have to make monthly repayments on a lifetime mortgage, but this can make them expensive as the interest rolls up.

The amount you can borrow depends on your age and how much your home is worth. You'll need to be at least 55, but the older you are, the more you can borrow. The maximum you can borrow is around 60%.

You can opt to take a lump sum – where interest is charged on the whole amount at a fixed rate – or take chunks of cash when you need it, only paying interest on the money you've taken. 

By spreading out the amount you borrow in this way (known as ‘drawdown’), you’ll reduce the impact of compound interest.

If you take out an equity release product recommended by HUB Financial Solutions, Which? will earn a commission to help fund our not-for-profit mission

Is equity release right for you?

Speak to the experts at HUB Financial Solutions, they'll be able to help

Go to HUB Financial Solutions

The pros and cons of equity release

Equity release isn’t suitable for everyone. An adviser will take you through all the pros and cons, but here are some things you’ll need to consider:

Pros

• Equity release can prove useful if you have value tied up in your property, but are worried about having enough to live on in retirement or to cover care costs.
• You can use the tax-free cash however you wish, whether that's for home improvements or helping out relatives. 
• You'll be able to stay in your home for the rest of your life or until you move into care, so won’t face the potential hassle of having to move.
• There's no obligation to make any repayments, although some products allow you to do so.
• The ‘no negative equity guarantee’ means that you'll never owe more than the value of your property when it's sold.
• It's a way of potentially cutting inheritance tax by freeing up cash to give to the family now, but inheritance tax might still apply if you die within seven years of gifting money.

Cons

• Not making any repayments on your loan will mean you end up paying far more than you’ve borrowed, due to the compounding of interest. This could mean the value of your property is wiped out entirely.
• Changing your mind can prove costly as repaying your loan early often triggers an early repayment charge.
• Using equity release will often reduce the size of your estate and the amount you’ll be able to leave behind for loved ones as the lender is repaid before the rest is divided among beneficiaries.
• Equity release can impact any means-tested benefits you are entitled to – for example, pension credit and reduced council tax.
• If you decide to move, your provider might not let you transfer your mortgage if your new property doesn’t meet its criteria. For example, it might not accept sheltered housing.
• Once you have an equity release plan in place, you won’t be able to use your home as security for any additional loans.

Find out more: what is equity release?

How to reduce risks

Firms selling or giving advice on equity release products must be authorised by the Financial Conduct Authority (FCA). 

Under FCA rules, a firm advising you about an equity release product must take reasonable steps to ensure it's suitable for your needs and circumstances. 

The Equity Release Council (ERC) represents providers and promotes standards of conduct and practice in the sector. Products provided by members of the ERC should meet the following standards:

• For lifetime mortgages the rate must be fixed for each release or, if variable, the rate must be capped for the life of the loan.
• You must have the right to remain in your property for life or until you need to move into long-term care, provided the property remains your main residence and you abide by the terms and conditions of your contract.
• You have the right to move to another property subject to the new property being acceptable to your lender as continuing security for your equity release loan.
• The product must have a 'no negative equity guarantee'. This means that when your property is sold, and agents’ and solicitors’ fees have been paid, even if the amount left isn't enough to repay the outstanding loan, neither you nor your estate will be liable to pay any more.
• All customers taking out new plans that meet the ERC standards must have the right to make penalty-free payments, subject to lending criteria.

Before using equity release, you’re required to get professional advice, so make sure your chosen adviser is a specialist in equity release. Advisers should hold one of the following approved qualifications:

• Certificate in Regulated Equity Release (CeRER) – awarded by the Institute of Financial Services (IFS).
• Certificate in Equity Release (CER) – awarded by the Chartered Insurance Institute (CII).
• Equity Release Mortgage Advice and Practice Certificate (ERMAPC) – awarded by the Chartered Institute of Bankers in Scotland. The ERMAPC was discontinued a few years ago, but may still be held by some advisers.

You can search for qualified advisers through the Society of Later Life Advisers. The ERC also has a member directory.

Which? Limited is registered in England and Wales to 2 Marylebone Road, London NW1 4DF, company number 00677665  and is an Introducer Appointed Representative (FRN 610689) of the following:

1. Inspop.com Ltd for the introduction of non-investment motor, home, travel and pet insurance, who are authorised and regulated by the Financial Conduct Authority (FCA) to provide advice and arrange non-investment motor, home, travel and pet insurance products (FRN310635). Inspop.com Ltd is authorised and regulated by the Financial Conduct Authority (FCA) to provide advice and arrange non-investment motor, home, travel and pet insurance products (FRN310635) and is registered in England and Wales to Greyfriars House, Greyfriars Road, Cardiff, South Wales, CF10 3AL, company number 03857130. Confused.com is a trading name of Inspop.com Ltd. 

2. LifeSearch Partners Limited (FRN656479), for the introduction of Pure Protection Contracts and Private Health Insurance, who are authorised and regulated by the FCA to provide advice and arrange Pure Protection Contracts and Private Health Insurance Contracts.  LifeSearch Partners Ltd is registered in England and Wales to 3000a Parkway, Whiteley, Hampshire, PO15 7FX, company number 03412386.

3. HUB Financial Solutions, for the introduction of equity release advice, who are authorised and regulated by the Financial Conduct Authority (‘FCA’) to provide advice and guidance on financial products for those who have retired or are approaching retirement (FCA Firm Reference Number: 455713). HUB Financial Solutions is registered in England and Wales to Enterprise House, Bancroft Road, Reigate, Surrey RH12 7RP, company number 05125701.

4. Alan Boswell Insurance Brokers Ltd (FRN 301), for the introduction of non-investment landlord insurances, who are authorised and regulated by the Financial Conduct Authority to provide advice and arrange insurance contracts. Alan Boswell insurance brokers Ltd is registered in England at Prospect House, Rouen Rd, Norwich NR1 1RE, company number 02591252.

Other financial services:

Mortgage service provided by London & Country Mortgages (L&C), Unit 26 (2.06), Newark Works, 2 Foundry Lane, Bath BA2 3GZ. London & Country are authorised and regulated by the Financial Conduct Authority (registered number: 143002). The FCA does not regulate most Buy to Let mortgages. Your home or property may be repossessed if you do not keep up repayments on your mortgage.

We do not make, nor do we seek to make, any recommendations or personalised advice on financial products or services that are regulated by the FCA, as we’re not regulated or authorised by the FCA to advise you in this way. In some cases, however, we have included links to regulated brands or providers with whom we have a commercial relationship and, if you choose to, you can buy a product from our commercial partners. 

If you go ahead and buy a product using our link, we will receive a commission to help fund our not-for-profit mission and our campaigns work as a champion for the UK consumer. Please note that a link alone does not constitute an endorsement by Which?.