I believe equity release represents a misunderstood and under-represented tool in financial planning today.
Some of our readers may find this statement controversial, particularly those who remember the bad advice that was dished out to thousands of consumers in the eighties and nineties as consumers were encouraged to borrow equity from their homes to reinvest in investment bonds. As many of you will remember, this went wrong when the recession hit in the early nineties, causing bond values to plummet and leaving pensioners unable to meet their mortgage payments.
These events and the bad press that followed have understandably tarnished the reputation of equity release. However, it’s important to note that the market has changed significantly over the last 20 years. Great progress has been made in relation to the regulation, controls and the protections that are in place for equity release products. And it’s why I believe equity release could and should play a role in the narrowing of the pension savings gap that a growing number of Brits face. This is estimated to total £1.6trn – which is staggering!
My eyes were opened to the potential of equity release products after I participated in a panel discussion at Altus Consulting’s conference this week, entitled Learning to Ski: Lifetime Mortgages and other ways to spend the kid’s inheritance. Altus have also produced a handy white paper on this topic.
If advisers were more likely or able to consider equity release products, such as lifetime mortgages and home reversion plans, as part of a holistic planning service it would allow for a client’s directly-held property assets to be viewed as part of the overall asset allocation to their fund retirement.
This could be particularly useful, given that so many clients have money tied up in their homes – and represents a factor that hasn’t gone unnoticed, which helps to explain the growth in the UK’s equity release market. In 2018, the Equity Release Council (ERC) reported withdrawals of £3.94bn from housing wealth – and Altus Consulting suggests that this figure could grow to £10bn by 2022.
Busting the myths
For the cynics out there, I think it’s important to start by examining a few of the myths that continue to haunt the equity release market:
1. “Equity release is poorly regulated”
This is not true. Equity release products have been regulated since 2004 and can only be recommended by qualified specialist advisers. The market is overseen by the ERC, which was set up in 2012. All members of the ERC must sign up to the Council’s Principles, Rules and Guidance.
2. “There’s a lack of protection for consumers”
This is simply not the case. The ERC has put a number of important protections in place for customers over the years, including:
» A ‘no negative equity guarantee’
» The requirement to take regulated specialist mortgage advice
» The requirement to take independent legal advice
» The right to remain in their homes for life or until they move into care – or to move to another property (if there is a suitable valuation)
» Fixed interest rates, and if they are variable they are subject to a cap for the life of the loan
» Property valuations undertaken by independent surveyors
3. “Equity release does not have a role in financial planning”
Equity release can play an important role, alongside pensions, in inheritance planning. Altus Consulting points out that pensions are potentially free of inheritance tax but an individual’s residence falls within their estate, which means there could be an IHT liability for beneficiaries.
“This opens up a potential IHT saving opportunity where wealthier clients could release funds via equity release and leave their pension intact to pass down,” Altus explained.
In addition, equity release could provide a solution to funding later life care, as well as a way to offer financial support to children and grandchildren while the parent is still alive.
Of course, equity release won’t be right for everyone and will need to be assessed on a case-by-case basis.
Challenging the status quo
So why is equity release such a niche within the financial advice market? I believe it’s due to a lack of openness to this type of solution (given the perceptions of old), as well as the regulatory barriers that exist.
The need for a specialist understanding of the equity release rules has reduced the availability of advice in this area. At the time of producing Altus’s white paper, ERC membership comprised of only 852 advisers from 257 firms out of a potential 35,000 retail investment advisers on the FCA register. This number is inadequate to keep up with demand.
It begs the question: why is there not a higher level of understanding and education amongst advisers to include equity release as part of their holistic planning process?
This is something I would like to see in the years ahead and believe there could be a real value associated with it. In the future, I would like equity release to be considered as a component of all retirement planning. Financial advisers and the government are missing a trick in tackling the UK’s retirement savings gap by failing to consider equity release as one of the available options (I can say this with conviction, given the calls I had with advisers last week who said they see it as an option of last resort). With thoughtful regulation and controls, I believe it could become a valuable aspect of holistic financial planning.
This article was created following Abbie Knight’s contribution to the Altus Consulting event, Learning to Ski: Lifetime Mortgages and other ways to spend the kid’s inheritance. You can download the full white paper here