Guest Comment: The support that consumers with under-funded pensions need

Retirements are lasting for longer, sometimes for many decades. Our savings and pensions are having to stretch for twenty, even thirty years. “How do we fund our old age?” is becoming a core question for societies today.

According to the latest Office for National Statistics' (ONS) statistics, pensions are the largest component of household wealth, however given the changing pension landscape, for many future home owning retirees, their biggest asset going into retirement is likely to be their home.

As accrued defined benefit pension wealth continues to decline, more and more people are going to enter retirement with underfunded pensions.

According to latest ONS data for the 55-64 age group, the median combined defined benefit and defined contribution pension wealth was £107,000. This is far below the pension pot size required to deliver a moderate standard of living in retirement.

According to the Pensions and Lifetime Savings Associate (PLSA) a pension pot size of £270,000 is required to achieve a moderate standard of living in retirement and that is for those with full state pension entitlement.

Consumers need help from the financial services industry to understand the role that their housing wealth can play, alongside their other sources of wealth, in funding their retirement needs.

There are generally three pillars of wealth that can be used to fund retirement: pension wealth, savings and investments wealth and housing wealth. For the self-employed, a fourth pillar exists, which is their business wealth.

For those that need to draw upon their housing wealth, they need clear access routes to relevant guidance and advice on how to best utilise their housing wealth against their other pillars of wealth

Help to ensure consumers consider all product options

There are an increasing number of product options available for customers wishing to utilise their housing wealth into later life. These products include interest servicing options, such as standard ‘Older Borrower’ mortgages that extend into retirement and Retirement Interest Only mortgages.

The products also include non-interest servicing options like equity release plans. Consumers need all options to be available and explained to ensure they don’t overpay in interest costs.

There are a number of types of advisers and mortgage brokers that operate in the later life lending industry, each with their own subset of products that they are licensed to advise and broker upon.

Products are often offered to consumers via distinct, and sometimes disparate distribution channels, which means that consumers might not always shown all the relevant products that could meet their needs.

There are a lack of advisers and brokers in the UK who are able to offer holistic advice to consumers on how best they utilise their housing wealth in retirement. There is also a risk of consumers not been shown the best product for their needs, due to the siloed nature of how later life lending products are distributed.

To benefit consumers, silos need to be broken down. If a consumer fails suitability on a product, they ought to be referred to an adviser or mortgage broker that can help them with another product.

Help to ensure consumers make the most of their housing wealth

Dynamic use of later life lending products over retirement can often ensure that the consumer gets the most out of the equity they have built up in their home. It’s important that the industry ensures its product design is flexible enough to allow this.

For example, it might make sense for a consumer to start by using a cheaper interest servicing option whilst they have income to service debt, and then refinance using a more expensive non-interest serving option such as equity release when they can no longer service interest.

Not all advisers and brokers operating in the later life lending industry provide ongoing advice, which makes it difficult for consumers to know when it makes sense to switch products.

It is also not easy for consumers to be able to compare their later life lending product options based on value and charges basis. More needs to be done by the industry to standardise fees and charges to make comparing and contrasting easier for consumers.

Lenders have an important role to play too to help ensure consumers are holding a product that best meets their objectives. There are a number of trigger points that occur in the life of a mortgage product when a customer ought to review their options with an adviser or broker.

When these trigger points occur, consumers would benefit from being signposted to advice. Trigger points include the end of a fixed rate period, the end of an early redemption charge period, any notification of vulnerability need or ill-health event.

The role that the pension industry has to play

Planning early is key and the pension industry is in a prime position to get consumers thinking ahead of time as to how best to utilise their accrued sources of wealth, of which housing wealth will form part of.

We believe consumers would benefit from their pension firms nudging or triaging them to relevant sources of financial guidance and advice, for instance when ‘Wake Up’ packs are issued. The pension industry could consequently become a significant new distribution channel for the later life lending industry.

As more and more people look to utilise their housing wealth in retirement in the years and decades to come, it is vital that industry standards are lifted to ensure consumers are given the best possible chance of making the most of the equity they have built up in their home.

If the industry remains siloed, the risk is that consumer outcomes will remain constrained, which could lead to future complaints – perhaps not from the consumer but from family members & beneficiaries who find little or no equity remaining for their inheritance.

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