Equity Release is becoming a mainstay on the menu of financial advisors as the wealthy seek to redistribute funds to the young while managing their potential Inheritance Tax exposure, according to our Later Life Finance first quarter update.
The motivations, attitudes and worries of global ultra-high-net-worth individuals (UHNWIs), those worth at least $30m+, are often hard to know.
Famously private, few know what they are thinking beyond their family, friends and perhaps their private bankers. That's why Knight Frank conducted a survey for its flagship publication The Wealth Report, of more than 600 private bankers, wealth advisors and family offices across 50 countries and territories, representing combined wealth of more than US$3.3 trillion.
The responses reveal how the wealthy think about finances during their latter years, particularly inheritance. Respondents cite the prospect of passing on wealth as both a concern – almost a third say they worry how they will transfer wealth to the next generation - and a source of motivation (24%), illustrating the degree to which leaving a legacy is so important.
Product innovation
The Wealth Report's findings have big implications for the evolving world of later life finance. They build on evidence that the sweeping regulatory change and product innovation we’ve seen in recent years have moved Equity Release products from a last resort for those struggling with their finances, to a mainstay on the menus of financial advisors and individuals seeking to make shrewd estate planning decisions.
Tax planning is likely to be one of the biggest factors driving the growth of later life finance in the coming year and beyond. Some 42% of respondents globally said tax will be one of their key issues when it comes to managing wealth during the year ahead, rising to 52% in the UK.
This is to be expected: low rates and huge fiscal stimulus have fuelled asset prices, swelling the population of high-net-worth individuals. Policymakers globally have signalled their willingness to target the wealthy in order to pay for the crisis.
Using a Lifetime Mortgage to gift wealth to the next generation can be a way to address all these issues. As we outline in our Equity Release Q1 update, the transfer itself is tax free at the time the gift is made. It then falls outside of the estate for Inheritance Tax purposes after seven years and creates a debt, reducing the taxable estate further.
Drivers of growth
The pandemic has accelerated other drivers of growth. While the pandemic has created new high-net-worth individuals, it has also placed significant pressure on the young.
The number of recent graduates out of work has doubled to one in eight since the onset of the crisis. More than half of job losses in the two months to February were among 18-24 year olds.
Older family members have stepped in to help, often opting for Equity Release products. Research by Legal & General suggests five million parents expect to offer additional financial support to younger family members due to Covid-19, providing loved ones with an extra £1.9 billion.
That’s in addition to the financial support they already provide. Over a third (39%) of young adults, around 3.3 million people, receive regular financial support from their older family members and depend on it to cover their monthly outgoings. Almost a third say they use financial gifts to save for big ticket items like housing.
All of this is attracting new entrants to the market. Royal London purchased a 30% stake in equity release company Responsible Group last month after predicting later life lending “will become a core part of financial planning”. Scottish Widows entered the market during the summer of 2020.
Rates on the rise
Rock bottom rates, another factor driving growth, are beginning to climb. In recent weeks, all Lifetime Mortgage providers have increased rates; a likely sign of things to come.
Unlike normal mortgages, Lifetime Mortgages are fixed for life, and rates move in tandem with long-term Gilt yields, which in turn reflect the future health of the economy. The first quarter economic contraction is likely to be far shallower than economists expected only a few months ago and the Bank of England predicts the economy will roar back to life from the second quarter onwards.
Market leading Lifetime Mortgage rates are currently just above 2.5%, and could hit 3.5% before Christmas, so it's worth speaking to a qualified expert now if you're thinking about your options this year.
If you would like to know more about Equity Release, please get in touch with our Later Life Finance expert David Forsdyke by email david.forsdyke@knightfrankfinance.com or by calling 01483 947764.