The post-war baby boomers are approaching retirement and in the next five years we are going to see an increase in the number of people aged over 65.
Some will have made adequate provision for their retirement but many will not. The recent expansion in the equity-release market seems set to continue as property markets soar on.
Advising on equity-release products can be a complex task and one factor not always considered is the impact that products might have on any surviving family once the plan has run its course.
Recent research from GE Life highlights some positive trends, such as wider acceptance of equity release as a possible retirement solution and reducing expectation of inheritance from children.
There is, however, one area of real concern where advisers must tread carefully to protect their long-term reputation: the issue of communication or in this case miscommunication within families regarding financial circumstance.
Immediately after World War Two, birth rates leapt in the UK. The 60th anniversary of the end of the war is next year and many people are set to retire.
To put this growth trend into context, there were 720,000 births in the UK in 1937 while in 1947 there were over one million – a 40 per cent increase.
Many of these people own properties they may be prepared to use for retirement income. In the past, the view of most parents has been that they intend to pass their home to their children but this position is changing.
Research shows people aged 40-55 are far more likely to use equity release for income in retirement than people over 65. Eleven per cent of over 65s say they may consider equity release in the future but this increases to 16 per cent in the 55-65 age group and to 23 per cent for 40-55-year-olds.
The equity-release market topped £1bn in 2003. With more people reaching retirement age and rising expectation of using equity release, it is clear that the upward trend will continue.
The preferences expressed by older children -40-55 year old children – also indicate a desire to see parents use their assets to enjoy their retirements. Only 8 per cent of older children expressed the preference that their parents should leave them as much money as possible. Over half wanted their parents to leave them some money but to enjoy their money while they could and almost a third preferred that their parents leave them no money at all.
Clearly, children want their parents to spend their accumulated wealth to enjoy their retirement.
The research also highlights some communication problems that must be addressed when advising on equity-release schemes. Only 8 per cent of children want their parents to leave as much money as possible to them but over one in five parents feel it is their duty to leave as much as possible.
These differing expectations become more complex when you turn to knowledge of financial circumstances. Around a third of over-55s discuss their finances with their children and over half think their children know what their income is. But only about a third of grown-up children – aged 40-55 – think they know what their parents' income is.
To some extent, it is possible to ask why should this matter? An equity-release plan is a contract between a product provider and the retiree receiving a lump sum or income to enhance their retirement.
But it is important to consider the long-term position of the children. If they are unaware that an equity-release plan has been taken out, one or more of the following reactions is quite likely on the death of their parents:
”If I had known about their personal circumstances I would have done something to help. How could an adviser have sold such vulnerable people such a product when there were other options?” Or:
”My parents would have wanted to maximise the amount that I would inherit. They would never have taken out a plan like this if they had understood.”
Such reactions are not uncommon when children are unaware of their parents' circumstances but such reactions can be enormously damaging to the reputations of advisers.
In a world where the creation of trust is a critical element in the advice process, damage to reputation and brand can cause serious long-term difficulties for advisers. It may impact on relationships with other professionals, such as solicitors, where an adviser has built strong links with a solicitor who becomes involved in a case where children question the original advice.
It can also damage relationships with communities from where future leads might arise – where children speak openly about the advice that was provided and its impact on them.
It is not just the right thing to do to involve children in any equity-release advisory process it is commercially essential.
But, having identified this potential problem, finding a solution could be difficult. The reasons that parents give for not discussing their finances with their children include the personal/private nature of the issue (25 per cent), the children never come to visit (15 per cent), it is “not appropriate” (12 per cent), and the children live away (9 per cent).
In almost two-thirds of cases, the reasons why families do not discuss financial circumstances are due either to privacy or distance. How should financial advisers address such issues? Do advisers have to consider themselves in the role of family counsellors?
In practical terms, there is little an adviser can do to force parents to involve children in discussions. This is almost one of those situations where know-ledge of the problem does little to provide a practical solution.
Equity release sales have to be cost-effective for all parties and that limits the extent to which such considerations can be pursued.
The Safe Home Income Plans' code of conduct requires solicitors to be appointed by the potential planholders and many providers then require the solicitor to confirm that the client is aware of the impact the plan might have on the family. This requirement comes from product providers who have no direct contact with a client until after the decision to purchase has been made.
For advisers who are involved with the client from the start, discussions of family circumstances and communication are essential.
Without such discussions, the long-term risks are substantial. And with them, there is even the opportunity of building a relationship with a whole family unit – possible further clients.
The views expressed in this article are those of the author and not necessarily those of GE Life