Nadeem Shaikh: The changing shape of financial lives
People are living longer, saving less, seeing the value of their property fall and becoming used to the uncertainty of Brexit Britain. Longevity means that the shape of our financial lives is changing. We will need to work for much longer. Our children will find it harder to afford property.
The price of property is falling but the availability of mortgages in a low interest world after the financial crash is restricted. The uncertainty of the employment market means fewer and fewer people have the same job for their whole life. We spend a higher proportion of what they earn as they earn it. People borrow more because interest rates are relatively lower and wages are stagnating. They save less for the same reason.
At the same time property prices are falling so the specter of negative equity raises its ugly, hope destroying head. All of this in the context of the uncertainty about the short and medium term impact of Brexit. Even if, the long term prospects for the UK after Brexit might be good, the immediate future will be disrupted. We used to take it for granted that our children’s lives would be better, more affluent and more secure than our own. We cannot take this for granted anymore. As individuals, parents, partners and providers, we need to plan differently.
The Fintech Industry needs to respond with innovation
In these dark times we need to look at every financial asset in a new way and it is the challenge for the Fintech industry to respond by presenting options for each of these products in new lights. For those who are living longer, retiring later and resisting becoming dependent on their kids, the largest asset is usually property. As close to 70% of home owners are over 55, it is in the equity held in this vast property portfolio that some of the answers to the savings gap and the demographic time bomb may lie.
For the over 55s it is too late. They mainly stood still in their financial planning while the world changed around them. Now they have to adapt and the fintech industry has to develop the new products that can help them change and educate the new generation of spenders and savings that the assumptions of their parents simply no longer hold true.
Technology, for example smart contracts, could address the problem of consistency of conduct of business rules which at present allow for different customer experiences of equity release, portals and platforms could drive down the cost of advice by offering one stop shops for processing equity release products. Given that the current cost of advice about which is the best equity release scheme is very high, 3-4%, there is plenty of scope for cheaper options. Technology can also help with the process of bringing children through the process of planning for and carrying out equity release in a structured, standardized way.
The Fintech industry is responding to this situation with some innovations but more needs to be done. The aging population creates a new market for products – loans for people who retire later, the FSA has cleared retirement interest only mortgage products. There also needs to be innovation to allow for the pooling of equity release from extended family members to contribute to specific care costs as they are needed. This might be linked to pay outs from life insurance to return the equity to the pot. It could be handled by a block chained based smart contract.
Such innovation and the need which drives them challenges the more traditional view of equity releases as the means of leaving an inheritance. The new reality is that the current construction of social care, the NHS and old age care is not designed for the demographic pattern we currently live with. The state pension, for example, is unfit for the purpose of caring for an aging population. More and more people who do retire still have debt. Many have interest only mortgages or have borrowed to fund life style choices or enforced periods of loss of income.
While none of us want to pay more direct tax or national insurance, the reality is that without higher taxes we need to make very different savings and spending choices much earlier in life.