"When you’re 30, a lot can stay the same in a year, but at 70 everything can change and often in far less time than 12 months."
We spoke to Steve Ellis, Managing Director at Legal & General Home Finance, about the need for holistic retirement advice planning and the changing face of equity release.
FR: The retirement sector has seen instrumental changes over the past 12 months – how do you see the market evolving over the next year?
Over the next 12 months, I expect to see a more collaborative approach by the various industry sectors that serve the in or at retirement market.
In the advice arena, I’d like to think we’ll begin to see the start of holistic retirement advice planning that includes the use of housing wealth, though I do think fully holistic retirement planning is still, sadly, some way off.
I also think we’ll see markets working together to achieve better customer outcomes. That means more partnerships like ours with Santander, where we’ve brought solutions to Interest Only Shortfallers for example, or the recent announcement by Yorkshire Building Society that they intend to offer lifetime mortgage solutions to customers.
Finally, I think we’ll see more product innovation, fuelled by market growth. This is of course provided that the industry can marry the changing needs of consumers in retirement with the complex funding that’s required to support the next generation of retirement lending products.
FR: What are the biggest issues facing retirees in the current economic environment, and what should advisers be aware of when dealing with clients?
There are two truths about retirement that haven’t changed in all the years I’ve worked in the sector; retirement lasts longer - and costs more - than you think. The debate about lengthening life expectancy and the change in demographics in the UK is well known. However, on the cost point, some research that we saw on entering the lifetime mortgage market in 2014 suggested that the cost of retiring on fairly modest means – one holiday a year, the odd meal out with the family and so on – was around a third more expensive than many had available to them to spend in retirement. And I think that for a great deal of people, one holiday a year having worked hard for, say, fifty years, is the bare minimum they aspire to on entering retirement.
Most of us have also spent those fifty years working hard to repay our mortgages each month, rather than they paying into a pension, leaving a generation of cash poor, but also asset rich older homeowners. That is precisely why lifetime mortgages are going to be an even more important part of retirement planning and why Legal & General entered the market in 2015.
As for dealing with clients in retirement, my advice would be to leave assumptions at the door. Contrary to popular belief, and from our own customer research, I can confidently say that life doesn’t stop at retirement. Debt doesn’t stop, the need for financial security doesn’t stop and for many even work doesn’t stop at retirement.
When you’re 30, a lot can stay the same in a year, but at 70 everything can change and often in far less time than 12 months. That’s why we’ve introduced free financial, legal and bereavement advice for all our lifetime mortgage customers and their next of kin.
FR: You have worked in the equity release market since the mid-1990s – how has the market changed and how does the modern lifetime mortgage differ from the original products?
Probably the biggest change is the one of ownership; when I joined the industry the overwhelming majority of plans sold were “home reversion” style where the customer’s house was sold to the insurer in return for a lifetime income. Today’s lifetime mortgages – rightly in my opinion – leave ownership with the customer and instead take repayment of the loan from the customer’s estate.
More generally though, the equity plans of today offer much greater flexibility and more options for customers than they did when the industry first started. Our Optional Payment Repayment feature, for example, which allows customers to repay parts of the loan without penalty, is a good example of how the industry has moved to meet changing customer demands.
Perhaps the biggest impact that we as a company have had on lifetime mortgages has been our mission to bring prices down towards the level of standard variable rate mortgages – around the 4.5% AER rate mark. This was unheard of even two years ago, and it puts lifetime mortgages squarely in the camp of providing good value for money to customers.
Not everything has changed though. The guarantees that the industry put in place back then – such as the ‘no negative equity guarantee’ – still exist today, providing ongoing security for our customers. Coupled with our modern features and good pricing, we think that means lifetime mortgages have clearly evolved to keep up with the times.
FR: How can equity release be better integrated into retirement planning, and what benefits would this bring?
We believe that property wealth in general should form part of a healthy retirement plan. That could include accessing equity in a number of ways, such as down-sizing, and not just a lifetime mortgage. For many retirees, the house is probably one of the best performing assets they have invested in. That said, we are still surprised by the lack of awareness amongst customers and some advisers of the role that modern lifetime mortgages can play in securing a better retirement.
A more holistic approach to retirement planning that includes the family house as an accessible asset through, say, lifetime mortgages, should therefore be the ultimate goal. Doing so is not without significant challenges though, not least of which is that in our experience customers don’t currently tend to think along those lines; unfortunately, it’s more “my house is my castle” and less “my house is my pension”.
With that in mind, at this stage we think the most useful part of integration into retirement planning is to start the debate with customers as they begin to think about retirement – that using their house is an option, well before the customer actually retires.
And if we can move customers into the space of asking – demanding – information about lifetime mortgages rather than attempting to push information at customers, we will have taken an important step towards truly holistic retirement planning.
FR: If you could see one headline about retirement in 2017, what would it be?
If I’m allowed to be selfish for a moment, I’d of course like to see the team at Legal & General Home Finance recognised as the market leading provider of retirement lending solutions in the UK. We narrowly missed out in 2016 and had to settle for second place after putting in a tremendous performance and delivering £620m of retirement lending in our first full year of business.
For the industry, it would be to see that retirement lending breaks the £5bn mark. Let me be clear, I don’t believe by any stretch of the imagination that will be the case. In fact, £3bn would be a great outcome. That said, we often talk about ‘lifetime mortgages as a product whose time has come’, and we have seen the momentum and pace of the market rising, particularly over the past 12 months. I think a breakout year for lifetime mortgages would signal that it was finally on the path to becoming a mainstream product, rather than a ‘niche’ solution. And by mainstream market, we mean more providers, more products, more distributors and more great value products for customers.