CML: current retirement landscape is inadequate

New CML research into consumer demand for retirement borrowing has identified "important knowledge gaps" in terms of understanding what consumers want and need in terms of products, as well as about how they make decisions about their retirement income and assets, and the advice they use (or would regard as valuable and trustworthy).

Related topics:  Retirement
Rozi Jones
10th November 2015
CML

The Council says that both the industry and the government need to gain more insight on these aspects to develop a lending market for older borrowers that offers attractive products that genuinely meet consumer needs as well as mitigating lending risk.

The researchers concluded that "the current environment does not adequately meet the needs of our ageing population", and that both the approach to conduct risk and the design of products need to evolve.

They urge consideration of reversion products, not just lifetime mortgages, as part of this evolution, but say:

"The development of an effective and appropriate market for retirement borrowing must also be sensitive to contextual factors that are likely to affect access to financial services in later life such as different levels of financial capability and vulnerability, digital exclusion among older people, the effectiveness of advice and guidance as the main source of consumer protection for different types of customer, and debt aversion preventing take up of potentially beneficial solutions to income needs."

An important part of the research highlighted that as life expectancy increases, people are frequently underestimating how long they will live and what their needs will be.

Pension reform has already resulted in a dramatic decline in annuity sales, increasing the uncertainty about whether fewer people will have adequate long-term pension income to ensure financial resilience and an ability to cover the costs of their social care needs as they age.

Additionally, the CML says that carrying debt into retirement (unsecured, as well as mortgage) is a relatively new phenomenon, and that the relative balance of paying for social care is shifting away from the State and onto the individual. Income is rarely sufficient to cover these costs and releasing housing equity is likely to become a more important component of funding for these needs.

Property supply and cost issues are also acting as barriers to trading down, and in the absence of resolution to these challenges the likelihood is that borrowing against equity on existing property increases - particularly as the perceived importance of leaving bequests seems to be diminishing among "younger older" cohorts.

The research also highlighted borrowing limitations, stating that future affordability assessment requirements that lenders have to undertake in line with recent reforms to FCA regulation have tended to be implemented cautiously, meaning that it has become harder for people to access conventional mortgage borrowing that extends into retirement.

Finally, while there has been a significant increase in the equity release/lifetime mortgage market, in overall volume terms it remains extremely small, and it still faces barriers in terms of negative perception by some consumers, as well as provider product design trade-offs between very comprehensive consumer protection, and greater flexibility and innovation.

Adrian Anderson, director of mortgage broker Anderson Harris, commented:

"With building societies committed to reviewing maximum age limits on mortgage lending, the CML’s report is timely, addressing a problem which has already becoming a real issue. Older borrowers are being penalised unnecessarily with lenders preferring to lend to first-time buyers than those with many years evidence of servicing a mortgage, simply because they are approaching retirement age.

"Lenders must recognise that the ‘new norm’ will be later retirement ages as annuity rates are low and life expectancy increases. Property is the asset that will be increasingly called upon to bridge the shortfall and finding ways of doing this, which are fair and affordable, is essential.

"When lenders are assessing mortgage applicants nearer retirement age they need to take more time to understand the other sources of income such as investment portfolios and different pension funds, which are more complicated than PAYE. It is essential that the question as to how the mortgage will be serviced and paid off is answered, but more time needs to be taken to look at all the options available to borrowers in their fifties."

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