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Actuarial Science and Insurance Series: insurance-and-pensions

A UK Equity Bank - how it could help provide income security to an ageing population

With increased longevity and new regulation an ageing UK population may find their income from pensions inadequate. Research by Cass Business School proposes a state-owned equity bank to help older people release equity from their property in a more efficient and less complex way than currently available.

Author(s): Professor Les Mayhew - Cass Business School; Dr David Smith - Cass Business School;

As the population of the UK gets increasingly older, the need to fund increased social care provision for the elderly becomes more urgent and more difficult. With the Office of National Statistics (ONS) estimating that there will be 10 million Britons aged 75 and over by 2040, it may be envisaged that these future generations of pensioners will be even worse off than the current one.

There are several reasons for this. Firstly, the transition from defined benefit pensions schemes to defined contribution arrangements is likely to result in smaller pensions, and these smaller pots will need to last longer too as longevity increases. Secondly, life expectancy for both men and women in this age bracket is increasing fast. Finally, there are the radical changes to pension rules announced in the most recent budget, which are likely to result in fewer people annuitising their pension savings. Without the guaranteed income of an annuity, some pensioners could find themselves experiencing straitened circumstances and may even need to look to the state for support.

However, even those pensioners who might be deemed income poor may also be asset rich if they are home-owners. Many older people have seen the value of their properties increase considerably over the last few decades. At present it may be difficult for them to realise the value of their asset; selling and moving may simply prove too disruptive and stressful. So, a scheme that allows older home owners to draw down the value of their homes could provide greater income security and reduce dependence on the state.

This research, undertaken by Cass Business School and launched by ILC-UK at an event in the House of Lords, proposes such a scheme. Although commercial schemes currently exist, this research suggests the creation of a state-owned (but not necessarily state-operated) Equity Bank which would help people release income from their homes in the form of a lifelong annuity. In return they would sell a portion of the equity in their homes to the state. The creation of such a scheme could counter the deficiencies of the current equity release market, where products are inefficient, expensive and complex.

This paper describes how the scheme might work in practice with examples and estimates of the size of the target population and the consequent cash flows both for the individual and the state. Finally, the paper considers the pros and cons to older people, Government, heirs and commercial equity release providers, that such a scheme might present.

The research paper is available for download below.

Attachment(s)
{The UK Equity Bank - Towards income security in old age}{https://www.cass.city.ac.uk/__data/assets/pdf_file/0011/363836/mayhew-smith-the-uk-equity-bank.pdf}
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