Have pension rule changes fuelled the rise of equity release?

What’s behind the growth in equity release?

The general trend for equity release over the past decade or so has been upwards – reaching record levels in 2022. One potential factor behind this growth could be the 2015 pension reforms, which gave people more freedom for using their pension savings.

The Equity Release Council reported in January 2023 that 2022 saw more customers than ever turning to equity release, with a 23% increase from 2021. A total of 93,421 people accessed their money with an equity plan, including nearly 50,000 doing so for the first time.

The market cooled in late 2022 and into 2023 due to caution about rising interest rates. But the long-term trend has clearly been for significant growth in this form of later life lending.

Some industry experts have suggested that the 2015 pension reforms have helped to fuel the growth of equity release – but is that correct? We take a look at this topic:

• What changes were made in the 2015 pension reforms?
• Are retirees emptying their pension pots too soon?
• Have changes to pension rules fuelled the rise of equity release?
• How can equity release help someone with a small pension?
• Is equity release right for you?

If you are looking at equity release due to a shortfall in your private pension, please call us on 0808 178 3055 or request a call back and we’ll arrange a no-obligation appointment with an adviser for you. Alternatively, check your eligibility and get an initial indication of how much tax-free cash you could unlock?

What changes were made in the 2015 pension reforms?

The rules on how people aged 55+ can access their ‘defined contributions’ or ‘money purchase’ pension savings changed on 6 April 2015. 

Prior to this date, your only option was to use your pension savings to buy an annuity. But from 6 April 2015, once you reach 55 years-old you can access as much of your defined contributions pension savings as you wish, as long as your scheme allows it. If your scheme prohibits it, you can typically transfer your pension savings to a scheme that does offer this option.

You have options for accessing your defined contributions pension savings, including:

Take lump sum payments. You can take up to 100% of your pension savings as one or more lump sum payments, directly from your savings. Up to 25% of your initial lump sum withdrawal will be tax free. You can then take further lump sum payments on a regular or ad-hoc basis.

Take an annuity. You can use some or all of your pension savings to buy either a lifetime or fixed-term annuity. You can for example take your 25% tax-free lump sum allowance, and then buy an annuity with the remaining 75%. Once it’s set up, your annuity income will be guaranteed and won’t be affected by fluctuations in the stock market.

Flexi-access drawdown. When you put pension savings into drawdown, your savings are invested and you take regular or ad-hoc withdrawals. There will be the possibility of your pension savings falling in value if your fund doesn’t perform satisfactorily.

People don’t have to choose just one of these options. For example, someone might decide to take a lump sum, put what’s left into a drawdown fund, and buy an annuity after a few years. There are other combinations of these options, and you should seek professional guidance or advice if this is a decision you face.

Are retirees emptying their pension pots too soon?

One concern when the pension reforms were announced was that some people may withdraw cash from their pension savings and not leave enough to fund their future income. 

At the time, the then Pensions Minister Steve Webb even said: “If people do get a Lamborghini [with their pension savings], and end up on the state pension, the state is much less concerned about that, and that is their choice.”

It certainly seems that many people did embrace the opportunity to access their pension savings as a lump sum. In September 2015, the Guardian was reporting that: “More than 200,000 people have emptied their pension pot or withdrawn cash from it after the relaxation of rules on accessing retirement savings this year.”

More recently, Amy Austin wrote in an FT Adviser article in February 2022 that: “…more than £45bn has been taken from pots since 2015. The concern is that this money has been taken out irresponsibly, without proper guidance or advice or concern for the consequences, something that pension freedoms made possible.”

There is a risk that if someone withdraws all of their pension savings, they may later on find themselves short of cash they need for their retirement – either in terms of regular income, or funds for large purchases.

Have changes to pension rules fuelled the rise of equity release?

We haven’t been able to find detailed research into whether access to pension savings after the pension reforms has directly caused growth in equity release. However, there is anecdotal evidence of this as we shall see below. Also, what may be of more concern is the fact that many thousands of people retire with small pension pots.

It is also interesting to note evidence that retirees are looking at their property wealth to fund their retirement, rather than a private pension.

In January 2022 for example, Legal & General published research that found that 22% of current workers plan on using the value of their home to fund their retirement. The research also reported that 35% of people yet to retire have less than £10,000 in their pension pot but own a property.

Also, in an equity release survey by Knight Frank Finance, the authors say: “40% of pension pots accessed in 2018/19 had a value of less than £10,000. Changes to pension rules have allowed consumers to spend their pension, and many are doing so quickly. As a result, consumers are increasingly having to fall back on property wealth.”

They went on to estimate that homeowners aged 55+ have accrued £3.1 trillion in housing equity as a result of decades of ‘robust growth’ in house prices. 

The report concluded: “Increasingly homeowners are looking to access that wealth, whether it be to help younger generations get a foot on the housing ladder, or to top up their income.”

How can equity release help someone with a small pension?

There are several ways that you could access your property wealth to help fund your retirement, including downsizing to a less expensive home.

Another option is equity release. If you are aged 55+ and own your own home, even if there is some outstanding mortgage, you may be able to free up some tax-free cash with an equity release plan. Equity release lets you do this without having to sell or move home.

Equity release may appeal to you as you won’t have to make mandatory monthly repayments. The loan itself and any accrued interest are instead typically repaid through the sale of your property when you pass away or move into long-term care. 

It’s not an option that will suit everyone and there are pros and cons of equity release. But for a homeowner with small private pension savings or none at all, it does open up the possibility of accessing some of your property wealth without having to move home.

Is equity release right for you?

If your pension savings are insufficient for your needs, why not find out whether equity release could work for you?  Call us on 0808 178 3055 and we’ll connect you to one of our carefully selected advisers who can answer all your questions, check your eligibility and get personalised quotes from leading providers.

You can also request a free call back here or get a free quote and an initial indication of how much tax-free cash you could unlock.

Please note that equity release is available to people aged over 55. However, there are other ways to release equity if you are under 55 that our selected advisers can also help with.

About Richard Groom. A writer with 20+ years’ experience across several sectors including financial services, Richard has a passion for writing clear and simple content on even the most complex of subjects. In his spare time, Richard loves exploring the hills and mountains of the UK on long walks with his faithful cocker spaniel. Follow Richard on LinkedIn