Andrea Rozario discusses the need to ensure people are aware of how using equity release can affect their state benefits
With the financial crisis leaving the UK facing up to the prospect of a prolonged period of fiscal austerity, the government has been praised for taking stringent steps to address the deficit through its Comprehensive Spending Review.
With an ageing population and greater longevity, combined with one of Europe’s lowest private pension provisions it is not surprising the government has sought to tackle the deficit by targeting state pension provision. But while the biggest headline grabbing announcement was the changes to the State Pension age, the government could find that by addressing the overly complex and disparate benefits system for pensioners, it could cut costs and ensure the most vulnerable are adequately supported.
Research from Safe Home Income Plans (SHIP) has found clients are overwhelmingly confused about how releasing the equity in their homes could affect the state benefits they receive. A worrying 88% of clients do not fully understand how their benefits would be affected by taking out equity release; with 42% not realising they would be affected at all, and 12% assuming they would lose their benefits completely. The research also found that over 50% of equity release customers are missing out on the state benefits they are entitled to.
The problem is that the current mix of non-means tested and means-tested benefits remains uncodifed. Added to this, qualification criteria for certain types of benefits can vary between different local authorities. Ninety-one per cent of advisers believe a lack of clear and consistent government information is one of the main obstacles to providing advice about the impact of equity release upon state benefits. So while consumers are turning to their financial advisers for assistance, it is so complex that many advisers are themselves unsure, and 23% said they would refer their clients elsewhere for guidance on benefits issues. Such is the array of different information available, only 15% of advisers would refer their clients direct to the Department of Work and Pensions (DWP) for advice on how their state benefits might be affected by releasing the equity in their homes.
If even professional financial advisers find the benefits system confusing to navigate then clearly more must be done to make this information more accessible.
Recent figures from the DWP show that 60% of pensioners source at least half of their income from state benefits – with 20% of pensioners receiving nearly three quarters of their income from state benefits. These are significant figures, but individually they do not add up to a significant income, as the Aviva Real Retirement Report highlighted earlier this year that there are thousands of pensioners in the UK who are living on less than £750 per month.
Missing out on wealth
With so many people reliant upon state benefits, it is worrying that a considerable number might be missing out on the wealth from their home, simply because they are unaware of the options. The report last year from the Pensions Policy Institute (PPI) shows just how significant this could be as it found that the country’s over-65s currently share £907bn worth of equity in their homes.
The need to raise awareness of the benefits of equity release schemes has never been more important. As such, earlier this year SHIP launched a campaign to clarify what impact equity release may have on state benefits by calling for a set of national guidelines. The main focus of the campaign was the need for greater clarification over the Assessed Income Period (AIP), the definition of “any expected future changes in income or capital” at the point of application for benefits such as Pensions Credit (PC), and definitions surrounding the terms used by the DWP such as “reasonable expenditure”.
The results of a working group meeting held at the House of Commons will be released shortly.
How we as a society fund this important stage in life is an issue that affects us all. Even with the retirement age moving to age 66 for both men and women, many pensioners and people approaching pensionable age will not be able to achieve their desired standard of living from pension income alone. Financial advisers can help ease the process of planning for retirement, but in order to do so they must make a clear set of guidelines on benefits.
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