Simon Chalk considers some of the product innovations in the equity release market
There’s a quiet revolution going on in the area of later life planning. It hasn’t gained much publicity, and not many people seem to have noticed, but hugely significant developments have been made this year. Two companies have launched ground breaking solutions to the problem of how we are going to pay the cost resulting from increased longevity and in particular, the cost of care.
They have in effect, made the financial planning equivalent of a breakthrough linking two cave systems. It is easy to underestimate the importance of what they have done so financial planners take note; we have the beginning of a symbiotic relationship between equity release and funding for care fees that will become the model for future product development. The pioneers are Partnership Assurance; the enhanced annuity provider, and More2Life; the equity release provider.
Partnership’s Care Plan Payment Option is designed to provide money to pay for care in a residential or care home. It involves taking a rolled–up interest mortgage secured against the home, with the cash funding an immediate or deferred care fees annuity, payments being made directly to the care provider. The money never touches the hands of the homeowner so there is no personal income tax liability, nor should it lead to loss of means-tested benefits such as Pension Credit. ‘Spending’ money this way by borrowing to pay for care could hardly be construed as depriving oneself of capital.
The homeowner (who must be single, over 80 years of age) is required to vacate the property by the time of completion of the loan. Partnership permit the now vacant property to be let out for a commercial rental income, paid to the owner, which could go some way toward paying for care fees. The effect on Age Allowance and means-tested benefit entitlement need to be carefully considered but at least it’s a valuable option.
The significance of this product is that for the first time, a single homeowner or the last of a couple to go into care can pay (for their residential care) without having to sell their home at a distressed price during a weak, slow housing market. Financial considerations aside, moving into care is hugely stressful for the elderly and their relatives who typically handle the practical things. With a high percentage of people dying soon after a move into care, anything that makes the task simpler and less stressful is to be welcomed, although capital protected options for the annuity ought to be considered. This plan could provide a temporary solution before selling the home as the loan is absent of early repayment penalties.
Further innovation in the market
I am hopeful that other lifetime mortgage providers will cotton onto this and change their policy of insisting loans are repaid within 12 months of the last person moving into care. Home reversion providers could offer a similar product and for even greater cash sums. Over 70,000 homes are sold each year to pay for residential care with just 3,000 people taking out an immediate care annuity, often from savings and investments or family support. Where else is the money to come from if not the home? A sure way for the equity release industry to dramatically boost sales from the current base around 20,000 plans a year.
The other major move this year has been the re-entry of More2Life with an enhanced lifetime mortgage. Partnership is also behind this project, having committed a good few quid to lending via More2Life so we should see their products around for some time to come. A series of 13 short medical and lifestyle questions could mean a homeowner qualifying for higher release amounts by having just one or two medical conditions or influencing lifestyle factors. An 80-year-old for example could release a 3% greater loan-to-value than under any other lifetime mortgages if they qualify for the plan. This might not seem a great difference, but for those seeking maximum releases it can be all the difference. Equity release planners should ensure their factfind accommodates such questions as their advice could be inappropriate.
As we live longer, we can expect to become increasingly frail or ill, requiring practical support for longer in old age. Two specialist companies have recognised ahead of others that the humble home is not just there to provide a roof over one’s head. Instead they see the home as being fundamentally a vehicle for paying for the extra years that people are going to live once their working days are over.
Scope for change post-Brexit
To tackle liquidity issues
More than £100m in pipeline
DB data published last week
'Heavily influenced by Morningstar'