EQUITY RELEASE: IS IT THE FUTURE?

Laurence Daly – Financial Planner

Equity Release has a severe image problem. When many people hear the term, minds jump to the poor products of the early 90s; when average British homeowners ended up with little income from their home and beneficiaries, sometimes, with debts to repay!

Equity Release was, and in some cases still is, associated with desperation – when all other assets have run out and nothing is left but the home. While this may have been true in the past, it is not likely to be the case in the future. Equity Release could soon become an integral part of a client’s later life planning.

 

So why is it that Equity Release will become more common? As defined benefit pension schemes all but disappear in the private sector, it is expected that property wealth will become the largest component of many household’s wealth in the coming years. Property as an asset class, has performed spectacularly since 1990 thanks to a collapse in interest rates (Bank of England Bank Rate), from an eye-watering 14.88% in January 1990 to the historic low of 0.1% today. The average UK house price has increased from £57,086 (Jan 1991) to £223,773 (March 2018) over this timeframe[i]

While defined benefit pensions still account for the vast majority (80%) of private pension wealth, by comparison, the amount in defined contribution pension schemes is very small. The average defined contribution pension pot is £44,000 as of March 2018[ii], providing nowhere near the income expected in retirement. As the Government looks to save money in the wake of the Covid-19 pandemic, may mean that the pensions triple lock will soon disappear, adding further pressure on older client’s household incomes.

If clients want to have a comfortable standard of living in retirement and use their resources to their meet financial need, then it is possible that, in the near future, Equity Release will become commonplace. Fortunately, the quality of Equity Release products has improved dramatically over the past few years.

Currently, over 90% of products on the market meet Equity Release Council Standards; created to improve the image of Equity Release and increase consumer protection. They are as follows:

  • Lifetime mortgages interest rates must be fixed or capped.
  • The borrower has the right to remain in the property until he / she dies or moves into long-term care.
  • The borrower has the right to move to another property and take the loan with them (provided the new property is acceptable as security for the loan).
  • The product must have a “no negative equity guarantee”, meaning that neither the borrower nor the borrower’s estate will be liable to pay any shortfall that may exist when the house is sold, and other legal fees are paid.

Not only have the standards improved, but the range of products has increased dramatically and as a result of marketplace competition, interest rates have fallen significantly.

Some of these features are:

  • Inheritance protection. Where the value of the final estate is guaranteed.
  • Drawdown products. Where the loan is initially underwritten (approved), but funds are only taken from the property when needed. This minimises the impact on the estate and can be used with pensions as an efficient form of tax and investment planning.
  • Buy-to-Let Equity Release. Where buy-to-let properties can be used to provide funds as well as the principal primary residence.
  • Interest rates have fallen from approximately 6% to 3% for the average loan over the past 5 years.

While Equity Release should not generally be considered a first solution for Inheritance Tax problems, it can be useful for those who wish to make lifetime gifts to their children, if the current value of their estate would lead to an inheritance tax liability. Through this, funds can be provided while the donor is alive, reducing the ultimate IHT liability on the estate. This is often more efficient than selling properties and paying capital gains tax at 28%.

The coronavirus crisis has meant that people may increasingly want to remain in their home to receive care rather than entering a nursing home. The cost of domiciliary care is almost as expensive as residential nursing care, local authority support is limited and likely to decrease further in the coming years. Faced with an increasing need for care, it is probable that using the value of one’s home will be an important part of later life planning in the coming years.

 

Sadly, the one area where Equity Release still falls down is its general application. It is one of the few financial products where we still see adverts on the TV. Just last week, the Financial Conduct Authority (FCA) released a report highlighting its concerns about Equity Release advice given to vulnerable clients. There are still problems which need to be resolved, but it’s clear the industry is trying to improve these issues.

Equity release when part of an overall financial plan can be a powerful tool to help meet a financial need. The key thing to remember is that it should be part of an overall financial plan, not a standalone product where the risk and benefits will usually not be correctly examined. When used with pensions, care fees and cash flow planning, Equity Release can help produce a comfortable standard of living in retirement.

A qualified financial planner can help ensure it’s used correctly, informing the client and their beneficiaries about its benefits and impact on their inheritance. As defined benefit pensions disappear and small defined contribution pension pots prove insufficient for a comfortable retirement, then equity release may become more commonplace. Sadly, those expecting a large inheritance from their parents’ property should probably temper those expectations!

This blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions and should be considered as guidance and not advice.  It is important for all individuals examining their pensions to seek expert financial advice from a regulated financial adviser.  Solicitors should be cautious when examining pensions with their clients as it is easy to stray into the area of regulated financial advice.  None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. 

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