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The Actuary The magazine of the Institute & Faculty of Actuaries

Safe as houses?

Prudential has sponsored a report on equity release by Professor Merlin Stone which cautions against over-reliance on home equity release as a financial planning tool.

The lack of financial preparation for retirement by consumers in the UK is well documented. The government has taken a number of steps to encourage individuals to save responsibly for their future. Yet there is still a gap between the financial assets that consumers gather in time for retirement and the amount of money that they need to live on comfortably.

The situation has not been helped by the decline of equity values and associated investments, such as pensions. A great many consumers now question the value of investing in financial assets, and believe that their ‘homes are their pensions’.

The rapid rise in property prices, widespread ownership of homes, and a prevailing view that property is a ‘one-way bet’ have made bricks and mortar look much more attractive as a long-term investment than pension funds.

Yet it’s becoming increasingly clear that consumers are courting financial disaster by putting all of their eggs into a single investment basket. They’re forgetting an important lesson from history: while both equity and property markets tend to rise over the long term, both suffer periods of significant price decline in real terms.

Additionally, it can be difficult to exit the housing market at a time that is convenient to sellers. While an investment plan can be turned into cash relatively quickly (depending on terms and conditions), it’s less easy to predict how easily a building can be sold, or the timeframe in which income can be realised.

The full report can be found at www.aedifico.co.uk/PDF/Safe as Houses.pdf