The guide, 'Your clients demand more from life – A 2005 guide to the UK Equity Release Market', explores the history of this sometimes controversial product; analyses the factors driving the market forward (drawing on extensive research carried out by Scottish Widows Bank with Britons aged 55 to 75 on their attitudes towards using the equity in their home to help fund retirement and mitigate inheritance tax); and, provides a route map to success for intermediaries wishing to sell equity release products.
Murdo McHardy, head of product development and marketing at Scottish Widows Bank, said:“Lifetime mortgages are potentially an excellent product to help transform the lives of those who may have benefited from house price inflation but who have low income in retirement. It also represents a valuable planning tool for the growing number of people being caught in the inheritance tax trap.
“Our report provides in depth analysis of how the market has grown and what the perceived barriers to purchase may be. It helps the intermediary, both new to the market and existing, to understand their clients’ motivations and how equity release can be used with confidence, where there is a recognised need for the product.”
In detail the report covers the following sections:
History of the market
This section of the report shows how assets have increasingly shifted from the traditional ‘pension pot’ to other forms of wealth, most notably property, as a direct result of growing levels of home ownership (30 per cent of people in England owned their own homes in the 1950s compared to 70 per cent today – meaning there are 14.6 million households which are owner-occupied2). Government policy – notably through the ‘right-to-buy’ schemes for council house tenants – has been a key driver for this.
The report also tells how poor product design combined with unpredictable interest rates led to the negative equity issues faced by those taking out equity release products in the late 1980s and early 1990s, and how the industry is now re-building confidence with consumers.
The factors driving the market forward
As a result of growing confidence and awareness for the past six years, the equity release market has been doubling on a biennial basis. Factors that contribute to this growth and predicted future growth include:
*The number of eligible households (in terms of equity stake in home and product providers’ age requirement) is set to see a marked increase – rising by 13 per cent over the next five years and as much as 58 per cent by 2030.
*Consumer behaviour and attitudes. Research (amongst those aged 55 to 75) by Scottish Widows Bank, published for the first time in the Guide reveals:
* 97 per cent of the key target audience are aware that they may be able to withdraw equity from their home
* 46 per cent would be willing to use equity release schemes
* There appears to be little understanding of how equity release can be used to mitigate inheritance tax – with those not willing to use equity release schemes increasing from 54 per cent for the whole sample to 56 per cent for those with children.
* The majority of those not willing to consider equity release could be persuaded of the benefits, if the industry did more to overcome the issues of trust and communicating risks.
* People on lower incomes are more likely to own their home outright with 82 per cent of those on incomes below £20,000 having finished paying off the mortgage compared to 57 per cent of those earning more than £40,000 – (not sure about this figure).
* 27 per cent of those between 55 and 75 are still paying off their current mortgage
* Only 1 in 5 people expect to have enough money in retirement to do all the things they hope to.
* The impact of regulation and the Government’s desire to increase simplicity and certainty in the marketplace will help foster more confidence amongst consumers. Within the guide Scottish Widows Bank calls for the Government to improve the simplicity of the tax and benefits system to help the industry in its efforts to communicate more clearly with consumers.
* The growing savings gap. The Scottish Widows Pensions Report, published in July 2005, illustrated that only 55 per cent of those people of working age who could be expected to save something for retirement were actually saving enough.
What an intermediary can do
Finally the guide gives a comprehensive ‘route map’ for intermediaries to develop themselves in the equity release market. This includes:
* Guidelines on choosing products (with an outline of how home reversion and lifetime mortgage schemes differ);
* The type of guidance that intermediaries could provide to potential equity release customers;
* Potential pitfalls facing both client and intermediary (e.g. conflicts of interest in cases with children from different marriages, the potential for family members to take advantage of older relatives or friends etc) and how to avoid them;
* How equity release products fit within wider financial planning issues such as inheritance; and,
* The need to consider tax matters and benefit entitlements of the potential client.
Ray Boulger, senior technical manager at John Charcol says in his foreword to the report: “As more and more people retire with a less good pension than they expected, often significantly so, but also with a lot more equity in their property than they would have expected only a few years ago, the potential for equity release to enhance many people’s enjoyment of their retirement is apparent. The need for greater understanding of the benefits and risks of equity release, and the increasingly wide choice of products, has never been greater. It is the responsibility of advisers, product providers, the regulator and the media to work together to make sure that those who may benefit from equity release are fully aware of the opportunities it offers for a more fulfilled retirement together with a full understanding of its risks. This report will help to achieve that goal.”
