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Monday, March 03, 2008

Catch the Charmed Generation whilst you can

The Sunday press contained a couple of scary articles.

The first concerned the increase in selling equity release schemes to people as young as 55.

The argument goes that because of the credit crunch and the level of indebtedness, people are needing to cash-in on the equity in their property much earlier than is financially sensible. In truth this has been happening for a while with people taking on second mortgages to fund current expenditure. Great as long as house pricing go up – disaster when they come down.

Stonehaven was the first to make a big splash in the fiftysomething market when it set up for business 18 months ago. It allows 55-year-olds to release up to 12 per cent of the value of their property as cash and then charges interest on this at 5.9 per cent, fixed for life. You can choose either to pay that interest as you go along or never pay any of it and let the whole debt roll up and be paid off when you die. Basically the kids watch their inheritance do a slow waltz out of the home into Stonehaven’s bank account.

Don’t get me wrong. I am no knocking Stonehaven or any other company operating in the equity release business. The only (just say that again) the only way that a large chunk of the 50-plus will be able to fund their retirement is by releasing the value of their properties. Somebody has to provide the financial instrument to enable that to happen. Whether it is the right thing for an individual to buy is another matter.

This brings me on to one of the causes of the problem. The lack of sufficient pension provision.

The Telegraph had an article titled: Private pensions take-up drops to one in four.

A report, from Policy Exchange shows that only one in four of Britain's 26.2 million employees have a private pension in addition to the basic state pension. This represents a sharp fall from 1991-92, when 39 per cent of workers were putting money aside for later life.

Taxpayers are struggling to save for their own pensions, while the annual burden of contributing to public sector pensions is predicted to rise by 33 per cent by the 2030s.

Only 15 per cent of private sector employees are now in final salary schemes and a mere four per cent are in schemes still open to new members.

Final salary schemes - where the pension is based on length of service and salary - are being replaced by money purchase schemes where the value of the pension is dependent on how much the employee and the employer put into the fund.

Yet the total of employers' and employees' contributions to the average money purchase scheme is only 9% of income which is not enough to build a decent sized pension.

Do you see the symmetry of all of this? Not enough pension – only asset the home – leads to earlier and earlier release of home equity.

The Charmed Generation (the 2.5 million wealthy 50-plus) are truly a dying species. Better start marketing to them before it is too late. Dick Stroud

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