Nigel Hare Scott goes through the issues clients need to be made aware of when considering equity release
A Home Truth can be defined as ‘An important truth that is unpleasant to acknowledge.’ Regrettably but similarly, the decision to enter into an equity release plan is often perceived as a necessary evil about which it is preferable to keep quiet.
The main reason why there is still such trepidation concerning equity release is attributable principally to a lack of understanding of the subject by most clients. There is of course no logic for them to be anxious about using their home to improve their retirement lifestyles. Indeed, many of them will have made use of the equity in their homes throughout their working lives in order to pay for cars, holidays, school fees and a whole host of other non property related needs.
As a consequence, homeowners approaching retirement will be familiar with using their homes as more than a roof over their head. Moreover, some of them may have already invested in second homes as part of their retirement strategy.
When undertaking a retirement review, it is customary for financial advisers to encourage their clients to switch their portfolios into a selection of less risky products such as cash, annuities and bonds. It would be inconsistent to exclude from the switching process the wealth tied up in the home. A suitably tailored equity release plan can enable retired homeowners to diversify their investment away from one non income producing asset (their main residence) into other asset classes giving them the opportunity of significantly improving their lifestyle in retirement.
With two thirds of wealth in retirement being tied up in the main residence, projected pension shortfalls, and a forecast increase of over 20% in the number of people aged over 65 during the next 10 years, it is almost inevitable that equity release will soon become a normal, rather than an exceptional course of action.
However, it is essential for us to educate clients fully on the implications of entering into an equity release plan in order to assure that:
• Equity release is only entered into by homeowners on an informed basis. This requires us to explain the risks with clarity and to explore alternative retirement options like downsizing or even selling up completely. Involving family and friends in the decision making should also be encouraged. An adviser must also be able to assess the possible impact upon benefit and grant entitlements.
• If equity release is right, the most appropriate product type is selected. Equal prominence should be given to both types of product in the advisory process. This is the most interesting and testing part of the equity release adviser’s role. Advisers need to be able to compare and contrast the respective advantages and disadvantages of home reversions and lifetime mortgages, and guide their client through the decision making process. Only after the appropriate product type has been identified can the search begin for the most suitable provider and plan.
Against a background of poor annuity rates, equity release represents an opportunity for us to propose additional flexibility to our clients in retirement. The possibilities might include:
• Deferring annuity purchase or pension drawdown up to the age of 75 by taking out an equity release plan. This approach could enhance future pension income, and be beneficial for inheritance of both the property and the pension fund, and for other fiscal planning purposes.
• Prior to retirement and /or pension drawdown, using equity release to bolster the pension pot. Tax relief is available at the marginal (top) rate on contributions and 25% tax free cash can be taken out of the pot upon pension drawdown.
Unlocking the potential
Obviously, detailed calculations will be required under both the above scenarios to ensure that the client will be better off. However, the exercise should be very worthwhile as most clients are already acutely aware that most of their wealth is tied up in their homes, but are uncertain about unlocking it to assist them in retirement.
It has been reported, according to Prudential, that around 13 million people expect property to form some part of their retirement planning with two million of these expecting their property to form over half of their retirement income. If this is the case, intermediaries specialising in retirement advice need to be in a position to provide comprehensive information on equity release to these clients, many of whom will be expecting us to do so.
Nigel Hare Scott is director at Home & Capital Advisers
Championing diversity in the workplace
Our weekly heads-up for advisers