OPINION: Defusing the economic time bomb
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Published last week, the UK’s latest census figures show the number of people aged 65 and above now exceeds those aged 15 and under for the first time in recorded history. Mathematical proof, if it were needed, that the population is getting older as greying baby boomers enjoy greater longevity.
On the one hand, this is good news. Most baby boomers, a cohort to which your correspondent belongs, enjoy considerably better health than their parents and grandparents, primarily because our standards of living have improved dramatically since we were aged 15. A cursory glance around the house highlights the degree to which our lives have been made easier – and healthier.
In the kitchen for instance, where old-fashioned mangles – of the type used by my Gran to remove excess water from bedsheets – have been replaced by significantly more effective tumble dryers, often housed in utility rooms. Carpet sweepers (remember them?) are no longer ubiquitous: nowadays, carpets are cleaned much more efficiently by a Dyson. While in the bedroom, old-fashioned eiderdowns or candlewick bedspreads have been upgraded to duvets.
A short meander down Memory Lane may raise a smile as we recall once commonplace gadgets, the rag-and-bone-man’s plaintive summoning for ‘Any ole iron’, or the early morning clink of glass which told us the milkman was delivering from his float. But there’s a serious side to an ageing population.
The Institute for Economic Affairs called the demographic changes highlighted in the census “an economic time bomb ticking away [which] no politician knows how to defuse” – a statement with which it’s difficult to argue. But why is this?
Back in January 2018, a report published by the Government Actuary Department (GAD) concluded that unless radical action is taken, which would include a change in legislation, the National Insurance Fund, the depository for State pensions, will be depleted by 2033.
Of course, that will not be allowed to happen and pension payments will continue to be made, but there’s every likelihood that the age at which people may apply for their pension will steadily rise following the next scheduled increase, to age 67, in 2028 and to 68 in the early 2040s. The future prospect of means-tested pensions cannot be discounted and we certainly should not discount the corrosive impact of inflation, an economic horror well remembered by baby boomers.
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Fortunately, most homeowners aged 55 and above have the opportunity to supplement their disposable income, avoid the ‘economic time bomb’ and enjoy life thanks to a long-term investment from which they can unlock tax-free funds.
For more than four decades, steady increases in property values have been augmented by often spectacular spurts of market activity, the combined impact of which recently propelled average UK house prices close to £270,000.
Older homeowners who have seen their property increase in value severalfold could release a proportion of the equity built up in their home, usually over many years, and use the capital to complement their everyday budget.
“Converting this equity into tax-free cash allows older homeowners to improve their standard of living by topping up their income,” says Mark Gregory, CEO of Equity Release Supermarket, the UK’s largest independent provider. "In effect, their property becomes a supplementary pension capable of delivering a variety of later-life options.
“Equity release can be used for any purpose: from paying off an existing mortgage, funding home improvements, or providing a regular income in a similar way to drawing down money from a pension pot,” adds Mr Gregory.
Many use the tax-free funds to help loved ones onto the property ladder for the first time, top-up income from under-performing investments, or pay for their children’s higher education.
It’s worth noting that homeowners accessing their property’s ‘hidden wealth’ will probably have less available in their estate when it comes to leaving an inheritance. Similarly, releasing equity may also reduce their estate’s value and affect their entitlement to means-tested benefits.
Nevertheless, releasing equity could boost older homeowners’ retirement finances. The degree to which they may improve can be determined by an independent, qualified equity release adviser who can provide a personalised illustration to help those aged over 55 to understand the process and the options available to them. It’s also possible to browse the UK’s first equity release search engine, smartER, a convenient platform where older homeowners can familiarise themselves with a range of different products and tailor their equity release requirements.
Baby boomers are often referred to as the ‘lucky generation’, a moniker which, though reasonably accurate, takes no account of how hard they have worked to achieve their goals. Now, as equity release moves into the mainstream of financial planning, many home-owning boomers have another opportunity to improve their lives and, most importantly, avoid the economic time bomb.
For more financial advice, check out Peter Sharkey’s regular blog, The Week In Numbers.