Retirement Money News

After a year of strong competition, the equity release market has seen the average lifetime mortgage rate increase and the number of deals fall over the last month, as the market feels the impact of the Coronavirus pandemic.

Our research found that during April over two-thirds of lifetime mortgage lenders increased rates on selected deals, with the average equity release rate for fixed and variable deals now standing at 4.34%, up from 4.23% a month ago and 4.20% in March.

In addition to this, we found that the choice of deals on the market has fallen to 357 this month, largely due to Pure Retirement condensing its range of options by 60. While the overall month-on-month fall of 66 deals may be a sign of things to come, today there are still 159 more deals available to consumers compared to a year ago when there were just 198 options available and the average rate stood at 5.00%.

Equity release market analysis 

Commenting on the research, Rachel Springall, finance expert at Moneyfacts.co.uk, said: “Borrowers may well turn to an equity release deal if they feel equity rich but cash poor, are looking to reduce their inheritance tax bill, or to fund the cost of care if they have little to no disposable income or savings. Consumers need to decide whether a lifetime mortgage is the right choice for them and, despite over two-thirds of lenders in the market increasing rates, it is vital that borrowers do not rush into a decision and ensure they get the right advice first.

“At first glance, a drop in the number of equity release deals month-on-month may seem concerning, but it is worth pointing out that most lenders in the lifetime mortgage market are still offering an abundance of choice. If more lenders consolidate their range though, then this could be more of a sign of restructuring their options to a target market. One area for consumers and advisers to monitor is the maximum loan-to-value bands, as these could tighten, however month-on-month there has thankfully been little change.

“The equity release market has had a buoyant start to the year. Indeed, according to the Equity Release Council, during the first quarter of 2020 the number of new plans taken out hit 11,079, the most seen in any Q1 period. In fact, £1.06bn of property wealth was accessed via equity release products, up by 14% from £936m a year earlier. As the year progresses, it will be interesting to see how this activity may adapt to the ongoing influences of the Coronavirus pandemic.

“If borrowers are still sitting on the fence on whether to take out a lifetime mortgage, then they would be wise to set up a phone call or video call with their financial adviser to go through their options during the lockdown if they have the time to spare. However, it is also important to discuss the implications with their family on how such an arrangement can impact their inheritance.”

*Calculations for May 2020 are based on providers’ current standard product data sets but, as a result of the Coronavirus emergency, criteria restrictions may apply or providers may offer additional temporary products in respect of desktop or semi-automated valuations.

Retirees looking for the security of an annuity will be disappointed to see that the average annuity income fell by 6% in the first three months of 2020, its lowest level on record.

Data due to be published in the Moneyfacts UK Personal Pension Trends Treasury Report shows that between January to March 2020, the average annual standard annuity income for an individual aged 65 (based on a single life £10,000 level without guarantee annuity) was 1.7% lower than the previous lowest level recorded in October 2019.

In addition to this, those saving for retirement will also have seen their pension funds severely hit during the first three months of 2020. The impact of the Coronavirus pandemic on the global stocks markets has resulted in the average pension fund value falling by 15.2% during this period, its worst quarterly performance on record.

There was more bad news for retirement savers as many popular ABI pension fund sectors posted even heavier losses, with UK Smaller Companies (-31%), UK All Companies (-29.8%) and UK Equity Income (-28.4%) pension funds hit the hardest. In fact, just 11% of pension funds avoided losses during the first three months of 2020.

The combination of lower annuity rates and falling pension funds has had a significant impact on the retirement incomes available to those saving into a private pension and looking to take out an annuity. For example, an individual who had saved £100 gross per month into a personal pension for 20 years would have built up a final pension fund of £41,388. Using this to take an income through an annuity at age 65 means that they will now receive just £1,663 per annum, down by 18.7% on the start of the year, and 14.4% lower than the previous all-time low in October 2016.

Commenting on the fall in annuity income and pension funds, Richard Eagling, head of pensions at Moneyfacts, said: “Whether it is individuals saving into a pension scheme or currently in drawdown, or retirees looking for the security of an annuity, the Coronavirus pandemic has had a devastating impact on potential retirement outcomes. The hope is that these will prove to be short-term shocks, but for those planning for retirement now and looking for a retirement income immediately, they present unenviable challenges. UK pension policy has increasingly moved towards placing more onus on individuals to take personal ownership of their retirement finances in recent years and take on the risks associated with this, but unfortunately recent events have shown how vulnerable they can be to major world events.”

Equity release lenders have responded to the Coronavirus crisis by withdrawing or making changes to their lifetime mortgages, such as lowering the maximum loan-to-value accepted, reducing maximum loan amounts and increasing interest rates. Between April 1 and April 20, the number of equity release products declined by 15%, according to data from Moneyfacts.co.uk. These have reduced from 426 to 360, a rate of three products being withdrawn each day of the month so far.

The 6 April is the start of a new tax-year and in 2020/21 there are a few, but significant, changes that those saving for their children’s future or a pension should be aware of.