Equity release enters the mainstream
Andrea Rozario: A lot has happened in the last few months within our economy, not least of which is the credit crunch. This has had an especially big effect on those with fixed incomes in terms of rising costs of fuel and food. Their income is being squeezed which makes it harder for the retired to enjoy any quality of retirement.
This, coupled with other factors such as the demographic revolution that we all know as the baby boomers, is now beginning to manifest itself as a massive change in society. People are living longer and getting older. For the first time ever there are now more pensioners than there are teenagers, which from the point of view of the economy, is really quite worrying. We have got to face facts that we have an ageing population and our perception of pensioners needs to change in line with their changing attitudes. The pensioner of today has vastly different expectations than we would normally envisage. They have very different attitudes to inheritance and often far more liberal attitudes to debt. Some may say that this is good, some may say it’s bad. But the increase in debt in the over 60s is a worrying trend.
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Andrea Rozario was appointed director general of SHIP in October 2007 and began her role in December. Andrea is responsible for developing strategy and communications activity with a range of SHIP’s stakeholders and increasing understanding about equity release among consumer and relevant organisations. Andrea heads SHIP’s management board, managing the execution of decisions from the main SHIP board. She began working in financial services 15 years ago and in July 2004, she set up Rozario Harris and Co Ltd, an award winning independent, whole of market IFA specialising in the equity release market which she ran until her appointment as Director General.
Nigel Barlow is head of retirement income solutions at Just Retirement. For the past 25 years, has worked in a variety of roles in financial services covering pensions, investments and equity release, including four years as head of research with an IFA organisation. He has been with Just Retirement since its launch in 2004 and is currently responsible for technical guidance and support together with investigation and development of products to meet the needs of those seeking to generate income in retirement. A frequent contributor to debates and articles in the press, he is an Associate of the Personal Finance Society.
David Black is principal consultant for banking at Defaqto. David specialises in credit cards, current accounts, equity release, mortgages, savings and unsecured loans and is a regular commentator in the media in these areas.
He writes detailed insight market reports and these have included annual reports on equity release in each of the last three years.
Dominic Fraser-Smith has worked in financial services for a number of organisations over a 10 year period including Marsh as a marketing consultant specialising in Affinity Schemes, Bradford & Bingley as customer proposition manager buy to let proposition. He is currently with Norwich Union as group product manager for equity release where he has recently launched a new product range including a market leading high loan to value product.
Ben Wilkie is editor of What Mortgage and www.themoneypages.com He has been writing about the mortgage and homebuying industry for around eight years.
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People want to enjoy their retirement and live life to the full. And this means they need to look at all their financial options in retirement, which naturally should include equity release as a logical option to be considered along with everything else.
So the baby boom generation has a different outlook on life. They have grown up with credit cards. Their attitude towards debt and their financial abilities are different to that of previous generations. Many of them are facing challenges later in their lives, such as divorce, remarriage and having children, and as the market develops and matures, we’re seeing more flexibility and innovation in product design to fit customers changing needs.
SHIP has welcomed three new members so far this year, including the Coventry Building Society, Dunfermline Building Society and Saffron Building Society. We now have products that carry no early redemption penalties, flexible drawdowns and the option to ring fence an element of equity to ensure there is some inheritance left to loved ones. All this innovation has led to increasing numbers of people being able to turn to equity release to plug gaps in their finances.
The current downturn in house prices is going to make people consider what their options are and whether equity release is right for them. But this has to be balanced with a long term view and a confidence in the values of the members of SHIP, which goes beyond regulatory requirements.
House price inflation in previous years means there is still a huge amount of equity tied up in people’s homes.
So the first question for the panel: Is there still confusion about what equity release actually is, especially when the term is also used for borrowers looking to increase their mortgage.
Dominic Fraser-Smith: I don’t believe this to be true for customers looking to release equity from their property do have a greater understanding of the term ‘equity release’ and the products that fall under the category. I believe that this is due to the amount of literature and advice that there is on the subject, not to mention articles such as this in monthly publications and in the daily press. Customers undertake a great deal of research into the market and often look for a name that they can trust. I think where the confusion may lie is in the difference between the pre-regulated products that were available in the 80’s that have received negative coverage and those available in the highly regulated environment of today.
David Black: Historically, equity release did mean people getting a new car from remortgaging but I think that has changed and thanks to lots of articles in the press people do realise it’s a separate product in its own right. But I think there is still a bit of confusion in the difference between lifetime mortgages and home reversion schemes.
Nigel Barlow: I think equity release is a confusing term and doesn’t really mean anything. Most people don’t understand what equity is, releasing equity therefore doesn’t really mean anything. Having said that, in financial services that’s nothing new.
People are spending time doing research, and that’s a good thing, and there are more places to get advice from, but generally speaking, financial services are not exciting and people don’t necessarily know what they are looking at.
In the annuities market, we carried out a survey and when we asked people if they knew what an annuity was, those who said yes were given a choice of five definitions – 65 per cent picked the wrong option for what an annuity is and equity release is a very similar thing, which is why it’s so important to get advice.
Andrea: Does any mistrust remain of the product from its less well regulated time in the early 80s?
David: I think it’s a legacy issue, really. Those types of products don’t exist anymore, thankfully. But if you look, you’re still going to find horror stories about them. But slowly the perception about equity release is less hostile.
Andrea: Is there anything we could do to improve the reputation of equity release?
Dominic: I think there’s a danger, if we’re constantly talking about products and then talking about how the market has changed then we never really distance ourselves from the pre-regulated products.
Nigel: But we don’t necessarily control that. The reason old products tend to come up is people pick it up in the press and the industry is always on the back foot then.
Dominic: I think one of our roles as product providers is one of education. We regularly do go out and see journalists as do other providers and update them on the equity release market and how it has changed.
Andrea: Education is a common theme and has been for some time. I think that, coupled with the innovative products, the safeguards that have been put in place and people’s changing attitudes, needs and desires is having a positive impact on the market.
Nigel: Within the last three or four years, there are more people with secure products, with flexible products. If you look, there’s something like £1.5 billion in undrawn but committed funds, which people haven’t yet used but can dip into whenever they want. As that grows, it becomes in its own right a big presence and as people realise they can dip into it, more people will become aware of it, of the flexibility of it. So usage of the current products is likely to drive out the ghosts of the past.
Andrea: Satisfaction amongst individual customers of equity release is in the high 90s, and a very low level of complaints. What we need to do now is build on this.
The next question is how has SHIP has helped to create a trusted market?
David: Firstly, the no negative equity guarantee is absolutely essential for trust in the market. Then there’s making sure there are trusted and qualified advisers, independent solicitors – the list of safeguards in the code of practice means that people can rest assured they’re dealing with a reputable organisation.
Nigel: The code of practice is nice and simple as well; it doesn’t complicate the issue.
Dominic: I think it also adds an independent voice in the market. By providing this view it adds credibility to comments on the market as the view is not of a particular provider. The work that Ship has undertaken goes beyond that of the Financial Service Authority, for example the requirement of independent solicitor and additional product features such as the no negative equity guarantee does and will continue to raise the credibility in the equity release market.
Andrea: The foundations laid down by SHIP and the fact we remain dedicated to the protection of the plan holder has put SHIP in a good position in terms of taking the market forward. It’s not that easy for a company to join SHIP. The guarantees they have to put in place give real tangible benefit to the customers, which means they have to consider their products, their guarantees and other factors. The fact we have such a stringent code of conduct means that we can stay dedicated to the protection of the plan holder. And while we want to grow the market, we want to do it safely, and that means retaining our core principles.
So, moving on, do customers actually understand equity release, what it is and how it works? How can this be improved?
Nigel: Given that customers do a lot of research even before approaching an adviser, they do understand the products. What you can do about this is in the communications – reinforce what they have, what the roll up of interest means. We need to keep the language simple.
Andrea: There is some conflicting research on this. From my perspective, I think that people understand the concept of equity release, but they don’t necessarily understand the different products or the safeguards that have been put in place.
Dominic: When customers are looking at equity release they do carry out a great deal of research. Providers are doing a lot of work in this area, and when you look at what they produce there is a lot of information in there – how it works, who it’s right for, who it’s not right for and there’s also a lot of professional advice out there.
Nigel: One of the important things in the advice process is pointing out the alternatives – a lot of people don’t understand what else they could do that may be more suitable, especially if they have other assets or state benefits. They could trade down, access other assets, or use more state benefits, for example.
Andrea: Instead of turning people off equity release, what this may do is delay their taking it up. They will use alternatives in the short term, and then revisit their options when it might be the best option.
So, moving on to the safeguards in place for consumers. There are several. The no negative equity guarantee ensures the clients will never leave a debt to their estate, the Key Facts Illustration, which must be given to a customer is also a safeguard – all SHIP members must ensure the product is easy to understand and all the pros and cons are laid out so that people can make an informed decision. They have the ability to move without any financial penalties, we insist on the customer getting independent legal advice and we also insist on a fully advised process by a suitably qualified adviser. Those are the core principles that SHIP has put in place. Customers will also have security of tenure, thereby knowing they won’t lose their home.
David: Some plans also allow you to have a protected equity segment, so you will always have a percentage of the value of your property remaining.
Dominic: From a provider’s point of view we also have the Treating Customers Fairly principles laid down by the FSA. At a high level this means that the products have to be designed to meet the needs of identified customer groups, that the customer can expect to be provided with clear information before, after and during the sale and that advice that is received is suitable and takes account of the customer’s individual circumstances.
Nigel: We need to be sure that people don’t confuse sale and leaseback products with equity release, because they are not the same. They are not treated as a financial product and they are not regulated in the same way. You don’t get security of tenure with these schemes.
Andrea: What are the reasons why people take equity release, and have you seen any changes in these reasons?
David: I think in future a big reason will be debt consolidation. There are an awful lot of people going into retirement with credit card debt, interest only mortgages, unsecured loans and on a state pension it must be pretty much impossible to maintain payments. On the plus side, people can use it to supplement their pensions, take holidays, home improvements, help the kids out, all sorts of reasons.
Andrea: Another is making improvements to the home and to help with the cost of care.
Dominic: Healthcare and inheritance tax planning are growth areas. In the past taking out equity release was seen by some as a last resort option; now it’s seen by an increasing proportion of customers as a lifestyle choice allowing customers to continue with the lifestyle they have become accustomed to.
Nigel: Most people have multiple uses in mind. They may come in to see us with one idea, but have other plans too. The uses emerge over time. You can be in retirement for 30 years and you’ll have a range of needs during that time. Helping the kids is something they are aware of, but attitudes vary.
Dominic: There is also evidence of a sandwich generation forming – customers who not only have to support their children, but also their parents. It’s a double whammy.
Nigel: With inheritance tax planning, you have to be careful that what you end up paying in interest is less than what you would have paid in tax. It has to involve very careful planning and often the benefit from an IHT perspective is that you need the money for something else, and coincidentally reduces the value of your estate. This means that your effective interest rate is lower, because what you are paying would have gone in IHT anyway.
Andrea: What are the pitfalls of equity release and what do customers need to be aware of?
Dominic: I don’t think pitfalls is the right word, pitfalls implies that there is a catch – which there is not. Equity Release is a solution to a particular customer need, to access cash from the equity in their property. It may not be right solution for everyone but for those who it is right for should realise that it is a long term product and because there are no interest repayments during the lifetime of the product interest does accrue to the debt. People should therefore be aware of this and what the impact is on the value of their estate over the long term, and there may be an impact on state benefits as well.
David: Some people would probably be disappointed by the amount of cash they can raise in comparison with the value of the property. But most of the schemes are going to be interest rollups and the provider does need to get a return on their investment.
In terms of home reversion, the main pitfall is that you are selling part of the house and if you die shortly after the sale, you will not have got the best value for money.
Nigel: I suspect that people think that there will be a lot of equity still left in their estate, but they need to realise that approximately every 10 years, the amount you owe will double. The longer you live the more the impact on your estate might be, depending on house prices. There are calculators on some websites, which can show you how much the debt will be depending on how long you live.
Andrea: People tend to have this perception, which is wholly inaccurate, that equity release is expensive and the lenders are making huge amounts of money. But when you compare it to other products that are available, then for many equity release represents good value.
Is it the duty of the lenders to help customers decide on equity release, and who should the customer consult to decide if it is the product for them?
Dominic: It is the duty of the lender to provide the customer with information about equity release and if it is suitable for them. In terms of helping the customer decide whether it is right for their specific situation then they need to seek qualified financial advice. I think we need to make sure everything is clear and have points of contact for any questions.
Nigel: I think it is the duty of the lender to ensure any customer knows where they can get advice and have access to information that is clear and easy to understand so they can get all the options.
David: I think there is a bit of a demarcation here. In this particular market because it is such a long term market, if I was a customer I would want to go to a suitably qualified adviser who covers the whole of the market.
Andrea: We have to remember that whether an adviser is independent or whether they are tied to a single provider, the clients must be told from the outset what the position is, the client will have to make a judgement call about whether they are comfortable with that adviser or company.
Ben Wilkie: What are the drivers of people coming to equity release? Are they doing their own research, being told by friends etc
Nigel: There are a lot of people who do their own research. Existing customers don’t tend to talk to people about it because they don’t necessarily want people to know that they aredoing it.
Dominic: We’ve actually seen a big change in that. Certainly in the past, people didn’t want to say they had taken equity release because it was seen as a last resort. But anecdotal evidence suggests that people are happier to talk about it. A lot of the referrals we are getting are from existing customers, who have talked to friends about it.
David: That makes sense because people entering retirement now are more comfortable with debt. Their parents, and certainly their grandparents’ generation having debt was a sin. But nowadays people are completely used to it so that means their attitude to equity release has changed.
Andrea: In some cases the impetus is coming from the children of the customer. They are more comfortable researching the market and they are coming up with the information. The customers also often
want their children to be involved in the process.
want their children to be involved in the process.
Date: 31st, October, 2008
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