There are many different reasons why consumers consider equity release - it is no longer considered as a last resort. Anthony Rafferty identifies the key issues for financial advisers to consider when advising clients on equity release
According to the latest industry figures from Safe Home Income Plans (SHIP), the total value of new business written for 2007 reached £1.21 billion, a 5% increase on 2006. More importantly for brokers, sales via intermediaries rose by a significant 25%, from 14,799 in 2006 to 18,531 in 2007.
So why do consumers take out equity release? Our own recent research, carried out among a snapshot of 250 of our own customers shows that as many people used equity release to purchase a new car as to generate income. This confirms that equity release should no longer be seen as the last resort option for those in financial difficulty. The most common uses for equity release are home improvements and funding a holiday. Other popular uses for the money released are to help children and grandchildren with tuition fees, to fund healthcare and mitigate inheritance tax.
The traditional use of equity release has been as a pension top up for many retirees. Escalating fuel and food prices along with council tax hikes have had a great impact on many retirees' income. At the same time, the basic state pension has failed to keep pace with inflation. In addition, while many may think that the older generation doesn't have the same problems with debt as the younger generation, we are finding it is an issue that is increasing. The estimated value of housing equity held by the over 65s in England and Wales totals £841 billion.
The changing face of society is also relevant and equity release is increasingly being used for "inter-generational" purposes. People are having children later in life creating a "sandwich generation" of those with dependent children at the same time as elderly parents who need care. Again, equity release can be an ideal solution to finance much needed care in the home. There is also the issue of struggling first-time buyers, and many parents or grandparents would be happy to release equity to help their offspring get on the property ladder.
Inheritance tax planning
Another reason for choosing equity release is for clients to avoid leaving 40% of their legacy above the current IHT threshold to the taxman. Traditional methods of IHT planning include reducing the value of the estate by making gifts (potentially exempt transfers), the use of trusts or taking out a life insurance policy under trust to cover the value of the expected bill.
However, if the majority of the estate is tied up in property, and there are no financial resources available for gifts or trusts, using the family home for IHT planning may be an option to consider.
If clients are considering using their house for IHT planning there are various options to make them aware of. Each of these has associated benefits and disadvantages. For example, one option would be to sell up and move to a smaller house. The equity created can then be used for 'traditional' IHT planning. Downsizing is a simple concept that can be effective. However the big disadvantage here is the disruption it causes for the client.
When using the home for IHT planning, the key option within the remit of the financial planner is the use of equity release as part of wider IHT planning. Some might consider this to be a complicated route. Yet in reality there are few differences from the traditional IHT planning process. Once the cash is released from the home the client is in the same position as any client who has the cash in the bank but with the additional liability of the repayment of the loan and interest.
The key factor financial planners must consider in advising homeowners on IHT planning is their attitude to giving money to beneficiaries early. Older homeowners may wish to see their dependents enjoying the fruits of their labour and so would find equity release an attractive option.
Financial planners should make every effort to encourage clients to get their family members to be part of the decision making process and even be present when they meet with the planner.
Of course using equity release for IHT mitigation is not necessarily the best option for everyone, so planners must ensure they take every eventuality into account during the advisory process.
The uses of equity release are as varied as the people who enter into the plans. Far from a last resort product, people are choosing to use the value in their homes for a multitude of reasons. It is the job of the adviser to ensure that a client's reasons for wanting to take out an equity release scheme are suitable by offering a thoroughly considered advisory process.
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