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Benefits and hazards

Better Retirement director Keith Thompson warns that advisers must have a thorough understanding of a client’s income-related benefits and be aware of the pitfalls before recommending equity release

The issues surrounding pensions in the UK affect us all but it is already a very real and daily challenge for millions of retired Britons.

However, many retired people who manage on the basic state pension and limited savings are also living in properties which, even with the recent falls in house prices, are worth a great deal of money. According to the Land Registry, the average house price in England and Wales in September 2009 was £158,337.

In 2009-2010, the full basic state pension is only £95.25 a week. The full basic state pension for a married woman using her husband’s National Insurance record is £57.05 a week. This means that a married couple could get separate basic state pension payments totalling £152.30 a week. If they both qualify for a full basic state pension, this could be £190.50 a week.

Although it may seem straightforward enough to just release equity from these mainly unencumbered properties, this process is lined with pitfalls that could be costly to clients.

There are many means-tested benefits that older people may be entitled to claim or, indeed, may already be in receipt of. The most common of these are pension credit and council tax benefit. Others such as support for mortgage interest, help with heating and insulation and disabled facilities grants may also be available. Until recently, anyone claim-ing means-tested benefits entered into an assessed income period which was reviewed every five years.

If recommending an equity-release scheme will affect a client’s ability to claim means-tested benefits, this does not mean that equity release should not be recommended, however, Mcob is very clear. Section 8.5.4R(1)(a) says: “A regulated lifetime mortgage contract will be suitable if, having regard to the facts disclosed by the customer and other relevant facts about the customer of which the firm is or should reasonably be aware, the firm has reasonable grounds to conclude that:

(a) the benefits to the customer outweigh any adverse effect on:

(i) the customer’s entitlement (if any) to means-tested benefits.”

It is therefore important that an adviser has a thorough understanding of these benefits because Mcob is also very clear that: “The firm must refer a customer to an appropriate source or sources such as the Pension Service, Inland Revenue or Citizens Advice Bureau (or other similar agency) to establish the required information.”

This can result in a delay in the process, a lack of professionalism, a pensioner struggling unnecessarily and, ultimately, a loss of business.

Specialists are willing to accept referrals and it could lead to additional needs such as general insurance and estate planning

There are specialist software packages and websites available that can assess a current situation and suggest which benefits and allowances remain unclaimed. However, these vary in quality and accuracy and may not have a facility to add in a “what if” scenario to plot future effects of taking a lump sum or regular release from the equity in property.

Specialist advisers Ship and Baroness Hollis have long been calling for the Government and local authorities to recognise that equity release can be used a retirement planning tool in its own right.

The Government has finally responded and in November made a number of changes to the benefit rules that may reduce the impact that equity release could have on income related benefits.

The Government has raised the capital threshold to £10,000 in pension credit and pension age housing benefit and council tax benefit. This means that pensioners can now have up to £10,000 in savings without it affecting their benefit.

If pensioners take out an equity-release plan and overall their savings remain at £10,000 or below, there will be no impact on their benefit payments.

A further change has been made to the rules on the application of an assessed income period within pension credit for those aged 80 years old or over. From April 2009, these customers will no longer have their retirement income and assets reviewed every five years, nor do they need to report any changes that occur to these. In effect, those aged 75 and over if in an AIP will benefit from this change.

These changes mean that more over-65s may be able to make use of some or all of the equity in their prop-erties to improve their standard of living in retire-ment without seeing their benefit payments drop or cease altogether.

Advisers that do not have the authorisation, confidence or regular involvement in this sector need not be excluded from it. Specialists are always willing to accept client referrals in return for an introducer fee and a guarantee of no cross-sales. Indeed, the process may even lead to additional needs such as general insurance and estate planning.

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