As an increasing number of advisers look to get involved in the equity release market Jon King discusses the need to improve understanding of the product
Equity release has come a long way, since its launch in the UK way back in the mid 1960s. People often express surprise when they learn that equity release has such a long history in this country. Many drivers to the business have remained constant over that period and many have changed. One thing that has and continues to alter is the intermediary's approach and view of this growing market.
In 2005, over 50% of the 'over 65s' wealth was held in bricks and mortar. (Source: Institute of Actuaries, Equity Release Report 2005). This figure is likely to have increased and more advisers are realising the importance of including these assets in their financial planning reviews.
Almost 70% of advisers questioned stated that they advised on equity release. This percentage would have been substantially lower in previous decades, particularly in the seventies and eighties.
The background to this growth is not just the increases in house prices experienced in recent years, but also the significantly improved life expectancy of the average person and the decreasing values of many pension plans. People are living longer, healthier retirements which require funding. Many within the industry were disappointed that Lord Turner chose not to include equity release as part of his review of pension provision in the UK. While property wealth will never be the complete answer to the demands placed on pension provision, more and more industry experts are realising the strategic potential of these products for solving individual financial problems in retirement. Over 80% of advisers considered that equity release is set to become a part of mainstream financial planning. This clearly reflects the growing realisation that to offer clients a complete service, a knowledge and competence in this area is a must.
Of course equity release is not just about buying a financial product. The Safe Home Income Plan Group (SHIP) recently published an adviser checklist for equity release, which contained the recommendation that people should, in the first instance, consider trading down before considering a plan. This, however, does not allow for the human elements of such a decision, as many people would choose to remain in their existing home for as long as possible. The SHIP Code of Practice guarantees right of tenure for life, and then the flexibility to move if required in the future, and are therefore critical design features of any scheme.
Reviewing the advice process
The advice process should also include a review of the availability of state benefits as an alternative to arranging an equity release scheme.
This research confirms previous research about how happy clients are with the schemes they have purchased, with over 80% of business stated to have come at least in part from referrals.
An improving understanding of the products and their suitability to different client circumstances has helped product providers design products which more closely meet client needs. This is perhaps best illustrated by the increased use and provision of the flexible drawdown type product. This product design has seen a huge increase in its use with 34% of all lifetime mortgages in Q4 2006 being written on this basis, compared to 8% for the same quarter in 2005 (source: SHIP). These schemes offer the clients the option to leave part of their borrowing 'undrawn' for use at a later date if required. Clearly, if clients do not have to take the maximum loan and are borrowing less initially, the eventual debt will be lower.
This innovation has meant that as an industry total lending has remained relatively static over the last two or three years despite plan numbers rising at a healthy rate (2006 14% increase over 2005, source: SHIP).
The survey suggests that there is substantial demand for more product innovation with approximately 60% of respondents calling for providers to make plans more attractive. Enlightened product providers will undoubtedly use intermediaries to help them further enhance their products to more closely match client demands.
Looking to the future
So what of the future? Well the current generation of pensioners are enjoying in many cases the golden era of occupational pension schemes that are almost certainly more generous than those that went before.
But what about the 'babyboomers'? Those who are 10-15 years away from a typical retirement date?
These people may well be relying on significantly less well funded pension schemes. Many will be members of money purchase, rather than final salary type arrangements.
They may however have significant wealth tied up in property, either through their main home, or indeed via second homes or even buy-to-let portfolios. Inevitably people in these younger age groups will be planning to use some of this wealth to help fund a long and hopefully healthy life after giving up a working career. These trends are occurring not just in the UK, but also in many countries around the world. This is where the potential lies for product providers and intermediaries alike. The challenge is for those with distribution strength to ensure that product design continues to evolve to meet the growing sophisticated demands of well informed consumers. We may well see products covering buy-to-let properties and a wider provision for clients who own more than one home.
Perhaps most encouraging of all was the fact that over 80% of intermediaries who, when asked if they would consider equity release as part of their own retirement planning, said yes. There is nothing like belief in a product before recommending it to others. For those of you who are not yet involved, I would encourage you to consider setting up the systems and controls necessary for advising in this area. The SHIP checklist provides a good starting point.
The requirement to have passed the specialist examinations to advise in this area will also focus minds on the need to obtain the expertise to offer quality advice to the growing numbers of clients who are expressing an interest.
The growth in demand may be happening on a worldwide basis - clients however act locally and look for advice closer to home. It is your choice as to whether it is your practice they approach.
FCA consultation response
MoneyLens to be edited by former Mail on Sunday journalist Vicki Owen