"Although equity release is rapidly growing in popularity, more people currently access that wealth in retirement by downsizing."
Since then pension drawdown has gone through a number of changes. The two most radical being those introduced by the pension simplification reforms in 2006, which amongst other things removed the need to take a minimum income and to buy an annuity at age 75, and the pension freedom changes in 2015 that basically removed all the withdrawal rules.
Now pension drawdown is the flexible friend which after age 55 can be used when and however required.
But drawdown was not a new concept in 1993. It was used long before then by those who had sufficient wealth outside their pensions to do so.
There has never been universal pension coverage outside the state pension. So those with small or no pensions had to call on their wealth to supplement their retirement income. Remember this was a world with much higher interest rates so those prudent savers lived off their building society interest. However, as inflation was much higher, in effect they were drawing down on their savings in real terms.
Advised and unadvised drawdown is probably used as often outside pensions as it is used within pensions. Those who have taken advantage of ISA allowances sometimes have as much, if not more, in their ISA than in their pension. Others who have not sold their shares under their employer share saving schemes may also have large number of shares to draw down in retirement.
However, most of the wealth held by those who are currently moving into retirement is in their homes. 63% of property wealth worth £2.5 trillion pounds is owned by those aged over 55. For those who do not have sufficient pension income they will - one way or another - call on that wealth
Although equity release is rapidly growing in popularity, more people currently access that wealth in retirement by downsizing. When they downsize they have access to a capital sum from which, if the downsizing was to supplement their other retirement income, will have to be drawn down over the rest of their life.
The most popular form of equity release is equity release drawdown. Latest data shows drawdown arrangements count for 65% of new equity release cases. Under equity release drawdown the lender agrees up-front how much they are willing to advance and allows the borrower to draw down on this amount as required. Usually each drawdown is subject to a minimum amount.
How much income is required from the equity release facility? Will that amount of income sustain for the remainder of life? How to manage the proceeds of each withdrawal? These all become issues that have to be wrestled with.
So we have reached a situation where those who retire may have to call on their pensions (which no longer have to provide an income for life), ISAs, shares and other investments, and equity released from their homes to provide their retirement income. How does a holistic collection of drawdown facilities look for a particular individual?
The main issues we experience with pension drawdown remain, e.g. How to invest? How much income can be safely withdrawn whilst ensuring the duration of the investment portfolio and so forth.
Introduce ISAs, some shares and other investments, and the issues become more complicated. Where should income be drawn from and how much? Now introduce a house. When will the equity be taken? How much will be released? Will the proceeds need investing? Can tax rules be used to the advantage of the individual?
If so, what will be the impact on the multi-asset drawdown approach described above? How much housing wealth can be included in calculations of what is a sustainable income before the equity is released?
Retirement drawdown advice is now evolving into how to help our clients to holistically produce the optimum retirement income for their needs – and in that sense it requires advisers who are adept across multiple product/sector strands.
