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Factors driving future growth

 

The equity release market is expected to increase significantly. This is underpinned by previous growth and a number of long-term demographic trends:

 

  • Growth in the potential market for equity release. The proportion of people aged 65 and over is projected to increase from 16% in 2006 to 22% by 2031 (source Help the Aged);
  • Homeowners in retirement have an exceptionally high proportion of wealth tied up in their homes. Homeowners aged over 65 hold £460 billion of unmortgaged equity in their homes (source Age Concern page 16);
  • The increase in house prices since 1991. The average house price reached £183,959 in the last quarter of 2007; an increase of nearly 240% from 1991 when a house was worth on average £54,547 (source Nationwide). Although house prices have on average dropped dramatically since 2007, following the June 2009 figures, the three month rate of change of +1.1% has turned positive for the first time since 2007 (source Nationwide);

 

Charts/Nationwide data 16July09

 

  • The average period in retirement will lengthen, increasing the financing requirement. Life expectancy at age 65 in the UK has reached its highest level ever for both men and women. Men aged 65 can expect to live a further 16.6 years and women a further 19.4 years (source National Statistics);
  • Pensions will be less able to meet the future financing needs of the retired due to a number of reasons, including;
    • Many companies are shifting from Defined Benefit to Defined Contribution pensions, as a result of the increased risk on the employer to provide a defined benefit scheme. This is due to the introduction of pension standard FRS 17 in November 2000, which required employers to report accurately any negative investment returns, as well as increased costs due to regulatory requirements;
  • At present, 63% of pensioners receive at least half of their income from a state pension. In addition, only one third of adults are currently contributing to a private pension, resulting in what will be heavy reliance on State Pension in the future (source Age Concern);
  • In 2008, inflation for people over 75 years old, reached a high of 7.8%, before levelling off to 5.5% towards the end of the year. Early 2009 indicates a further reduced inflation of 3.6%, however this is still 46% higher than the average (source Age Concern)

While the equity release market saw a 9% decline in new business value in 2008, it should be seen in the light of the 30% drop in overall mortgage lending in 2008. Consumer research suggests that there is a greater acceptance of equity release among today’s 45-54-year-olds – tomorrow’s potential customer base.