Home-baked recipes to fund retirement

Millions of consumers remain hostile to the idea of using an equity release scheme to boost post-retirement income, suggests research.

Equity release providers believe this may be because of the bad reputation of schemes in the past and unfounded consumer fears that they may lose their home. They say that “negative equity guarantees” now ensure homeowners will not lose their homes. Stronger financial regulation introduced in April and a new equity release exam for financial advisers are also signs of improving standards, they say.

Research by Retirement Plus, the equity release provider, among 1,000 consumers in the north of England in June found that 64 per cent ruled out using the value in their home to raise cash to boost retirement income. For retired people the figure was even higher at 78 per cent. Only 6 per cent of those surveyed said they would consider using equity release in the next year.

Those planning to use equity release cited a broad spread of reasons, including improving day-to-day living standards, purchasing luxury items such as holidays and cars, home repairs, family help, repaying debts and paying for operations such as hip replacements or for
better homecare.

There are two main types of equity release plan: lifetime mortgages and home reversion schemes (see below). Both work by releasing the value in a property to a provider in exchange for either a lump sum or a regular income or a mixture of both. Homeowners can release as much or as little cash as they wish but when they die the equity release company will expect its loan to be repaid or, if all the equity has been exhausted, to take possession of the house. This can also apply if the homeowner goes into
permanent long-term care.

In the past there was a risk that homeowners could be evicted if they had spent all the equity but now nearly all lenders have a “negative equity guarantee” which allows borrowers to remain in their homes until they die even if all the equity has been exhausted.

In spite of improved standards and the better reputation of the sector, the market remains small with only 40,000 new plans arranged each year and about £1bn of equity released. Experts predict the sector will grow, however, as the population ages and pensioners faced with underperforming pensions turn to equity release to top up their incomes.

An increasingly popular use for equity release schemes is to cut inheritance tax bills by reducing the size of estates on death. Borrowers using equity release need to beware though of affecting state benefits, such as
pension credits.

Duncan Young, managing director of Retirement Plus, says its research indicated that many people were put off equity release because of its past reputation and because they had retired with good company pension schemes and did not need the extra income. “That won’t be the case for the baby boomer generation who may well be faced with poor retirement income and need to turn to equity release to supplement it,” he says.

More than 20 companies offer equity release and there are more than 70 products available. Most expect homeowners to be aged 60-75 but some will go as low as 55 and some older than 75.

Research by Norwich Union, one of the largest equity release providers, pointed to consumer confusion as a barrier to greater take-up of these schemes. Elizabeth Boardall, head of post-retirement at NU, says that explaining the value of equity release to consumers is a top priority because of the misconceptions. One concern is a shortage of specialist independent advisers, she says.

Dean Mirfin is business development director of Key Retirement Solutions, one of the biggest UK equity release advisory firms which arranges 6,000 cases a year. He says that up to half of the older people who contact his company are still afraid of losing their home yet this threat no longer applies.

Experts agree that equity release is not for everyone and other options should be explored first. Andrea Rozario, a financial adviser with Essex-based equity release specialists Rozario Harris & Co, says: “Once the public have become aware of the safeguards, the flexibility and just how positive an impact equity release can make on their lives, then the hostility will dissipate.”

Teresa Fritz, principal researcher at Which?, says consumers must seek professional independent financial advice before considering equity release and should be prepared to pay to ensure the advice is unbiased.

She says that improvements in regulation and guarantees mean that equity release could be suited to some who are “asset rich but income poor”. However she advises that other alternatives should always be explored first, including downsizing and talking to family members about a family sale and rent-back supported by a legal agreement. Local councils can also sometimes offer non-profitmaking equity release schemes which might fund urgent repairs but avoid outright sale of the property.

“It is vital that people get independent financial advice and consider all the options,” she emphasises. “Never, never buy direct from a
provider.”

Help the Aged has been so concerned about poor standards that it launched a non-profitmaking financial advice subsidiary, InTune, in May. Anne Grahamslaw, managing director, says half of
its clients were advised not to take out equity release.

Safe Home Income Plans, the providers’ trade body, is striving to raise standards further. It adds its logo to approved plans and has its own code of practice. Laurie Edmans, chairman, says raising standards of advice is a priority and the body has thrown its weight behind a new equity release exam.

Further advice and information: To find an independent adviser on equity release go to: www.unbiased.co.uk (0800 085 3250).

The Personal Finance Society (www.thepfs.org) and the Institute of Financial Planning (www.financialplanning.org.uk) also list members who can offer advice.

Useful websites: Financial Services Authority – www.fsa.gov.uk; Safe Home Income Plans – www.ship-ltd.org; Which? – www.which.co.uk.

Help The Aged offers a free equity release guide at www.helptheaged.org.uk.