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A new release of life

A combination of economic factors and improved products will see equity-release business continue to grow.

There is little doubt that equity-release plans are going to play a major role in financial planning in the years ahead despite the post-regulation drop in sales of lifetime mortgages.

Talk to advisers who regularly write equity-release business and they will tell you that the market is going to keep on growing.

It is not a surprise. Scarcely a day goes by without Britain’s pension timebomb making the headlines while longer life expectancy is increasing the gap between provision and actual retirement need. People who have retired since the new millennium have also been hit by falling annuity rates and volatile stockmarkets which have reduced pension fund values.

Pensioners are searching for alternative ways to boost their retirement income, pay for care-home fees or simply treat themselves to the odd luxury in retirement.

The house price boom has given thousands of people the opportunity to unlock the value of their property to meet those needs. Many advisers have taken the bull by the horns and have gone out of their way to specialise in equity-release plans while others meanwhile, have adopted a watching brief.

The huge popularity of equity release has caught the eye of the FSA. Not only has the FSA brought lifetime mortgages under its regulatory umbrella but also it has recently voiced concerns on how the plans are marketed. The legacy of the infamous home-income plans of the 1980s lingers and inevitably there will be some advisers who fear accusations of mis-selling in the future.

Equity-release 2005-style is a different animal and there is every reason why advisers should consider them as a legitimate financial planning tool. The Actuarial Profession’s 2005 Report agrees that equity-release schemes can help “empower older homeowners” and “can make immediate and significant improve- ments” to the quality of life. Plans from reputable pro-viders today come with a guarantee of no negative equity and the flexibility to allow clients to move.

The October regulation of one type of equity-release product – the lifetime mortgage – should be viewed as a positive development and it will help protect all involved, from the provider to the IFA and, importantly, the client.

Lifetime mortgages give homeowners the choice of taking a lump sum or income. People take out a loan but do not pay any interest payments. The interest is rolled up and added to the original loan, which is repaid when they die or move into long-term care, normally out of the proceeds from the sale of the home.

The other main type of equity-release product – the home-reversion plan – was not included in mortgage regulation because the plan is not actually a mortgage. With a home-reversion plan a homeowner sells part, or all, of their property in return for a lump sum and/or an income for life. The FSA has now proposed to bring reversion plans under its remit.

The lack of regulation is reckoned to be one of the main reasons why sales of lifetime mortgages far outstrip home-reversion plan sales.

Indeed, a recent survey by the Society of Financial Advisers revealed that some advisers do not use reversion plans because they are unregulated products. Whether this difference continues remains to be seen.

Interest in reversion plans may return because of the recent slowdown in house prices. One of the objections to reversion plans is that when house prices are rising, homeowners are deprived of any future increase in value.

The same survey, however, showed that home-rev- ersion plans were proving unpopular for reasons other than simply being unregulated. Lifetime mortgages have certain benefits. With a lifetime mortgage, customers remain the owners of the property, unlike home-reversion plans where people effectively relinquish ownership for rent-free tenancy.

Lifetime mortgages give customers the flexibility to repay the debt, move home or draw down more cash. The mortgage will reduce the value of your estate, therefore reducing any tax that could be payable on death.

The one criticism always levelled at the lifetime mortgage product is how interest payments can soon add up – a loan with a rate of 5 per cent a year will double after 14 years.

Home-reversion plans also have their benefits. Older clients, for instance, are able to release more equity in their home via a reversion plan than with a lifetime mortgage.

Unlike a lifetime mortgage, they will know what share of the property will be left when the plan ends. The proportion of the property sold also reduces the value of the estate, therefore reducing any tax which could be payable on death.

Whether the preferred choice is a lifetime mortgage or a home-reversion plan, the crucial point for advisers is to strike a balance between risks and benefits.

At NU, we are only too aware that equity release, irrespective of the type of plan, will not suit everyone. Equity release is likely to be a person’s last major financial transaction. Clients need to be made fully aware of all the implications to be able to weigh up the pros and cons before coming to a decision.

When used effectively, equity release can boost retirement income, reduce inheritance tax liability and fund long-term care fees.

The sector is not going to disappear into the ether but its success will ultimately be down to how the products are sold.

People will need expert impartial advice. This is where advisers fit in. Equity release is, without doubt, a major decision for parents and their family as the decision will have an effect on estates so advisers should be there to help them make the right choice.

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