Dominic Fraser-Smith looks at the need for further education when it comes to equity release
On the face of it, advising on equity release should be relatively simple - just look at the figures. There are over eight million UK pensioners (source: Office of National Statistics), many of them sitting on unmortgaged housing equity. At the same time, this older generation is suffering from savings income that has fallen, insufficient pension provision and a pensioner inflation of around 5.9% (estimated at 3% higher than the official Consumer Price Index (CPI) of 2.9%). So, helping this segment to use the equity in their properties to improve their financial situation would seem a logical move.
Life is never simple
Unfortunately, life is never that simple. Indeed, the industry's reputation is suffering from poor perceptions from some quarters, resulting from unregulated products and poor advice provided in the early nineties. So what can we do? Ultimately, we need to educate the client and their families of the positive benefits equity release offers. Through understanding comes interest, sales and in due course generations of consumers who see this product range as an in-retirement funding option.
As part of clients' retirement planning, we need to see equity release evolve as a key product. How can a client be advised on their retirement without their largest asset being taken into consideration? If a client has a mismatch between their required retirement income and projected retirement income, then equity release should be an option that is discussed at this time as it may meet their requirements.
So, what misconceptions and concerns do we need to tackle when giving advice on equity release? Firstly, you need to deal with the client's worry that they might have to pay back more than their house is worth. This is easily tackled by explaining the no-negative equity guarantee that all members of SHIP offer their clients. This ensures that the client or client's estate will never owe more than the value of the property when it is sold on the open market. This is normally a great relief to clients who often come from a generation that does not have the free and easy approach to debt that younger consumers have.
Another worry for many pensioners is whether they can leave an inheritance to their children if they use equity release. This is a concern irrespective of the fact that for many people, seeing their parents enjoy their retirement is worth more than an inheritance! So how do you work through this?
Firstly, we believe it is important to involve the family in the equity release decision-making process. This gives the family the peace of mind that everything is above board and that their relative is not being taken advantage of. This can also be an opportunity for the family to reiterate how they would forgo their inheritance to ensure that the potential equity release customer enjoys their retirement.
If the potential client is still worried about this issue, it can influence the best type of product for them in the long run. You may wish to recommend a home reversion product where a percentage of the property is sold in return for a cash payment while the client retains ownership of the remaining share of their property, rather than a lifetime mortgage.
A further anxiety for many pensioners is the impact that any additional income will have on their benefit payments. This needs to be handled methodically and carefully as it would be pointless to find that your client is in a worse position financially due to the use of equity release. There are a variety of software solutions that advisers can use to ensure this does not happen and it is well worth investing in these tools.
This issue was to a certain extent alleviated in the most recent Budget when Alistair Darling announced that the amount pensioners could have in savings, without it affecting their benefits, had risen to £10,000. This move, when combined with certain lifetime mortgages and income generating equity release products, is set to ensure that many pensioners can reap the benefits of equity release without losing their actual benefits.
Regulating the market fairly and ensuring it is 'safe' are where other uncertainties lie. Despite the lobbying many organisations have been doing, the shadow of the industry's past is still at the forefront of many people's minds. So how do you answer this question?
You could mention that you - yourself - are regulated by the Financial Services Authority (FSA) or that lifetime mortgages have been regulated since 2004 (Home Reversion 2007) or - indeed - that SHIP, the industry trade body, has strict rules governing sales and advice.
As an additional benefit of taking a plan through a SHIP member is the requisite for independent legal advice that customers take before signing a plan.
What if I move? Unlike some of the products available 10 years ago, equity release is no longer a barrier to moving house and all SHIP members guarantee that the equity release product is portable to another property, subject to lending criteria.
As I said, education is key and taking the time to go through these common questions with a potential client can really pay dividends in the future and help more customers see equity release as a product that can help support them through an enjoyable retirement.
The increase in minimum AE contributions has had little impact on opt-out rates - with cessations after April increasing by less than two percentage points, data from The Pensions Regulator (TPR) shows.
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