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Distribution points

Reduced consumer confidence is having an impact on investment and mortgage sales for advisers at a time when the regulatory burden is increasing.

Some advisers are using this quieter period to consider broadening their range and look at new revenue streams and one which is often mentioned is equity release.

I know the potential of the equity-release market has been much discussed and I am also well aware that over the last few years it has been broadly flat.

But volumes have recovered after the fall which followed the introduction of regulation in 2004 and the ensuing improvement in advice. This resulted in a shift to drawdown schemes and an end to the practice of over-releasing equity to invest in a bond.

Over the last five years, we have, on average, around 25,000 cases, representing £1.1bn annually.

However, the broader picture masks some of the trends at a micro level.

Unlike other financial products, where there is reasonable level of awareness, the same cannot be said about equity release. It is a product that needs to be sold actively to customers at the point at which they need it. It is, therefore, very dependent on the availability of distribution. Advisers that know the market well will also be aware that there have been issues with some providers which have restricted marketing activities.

I believe distribution is the predominant reason for the limited growth in volumes. There are a limited number of suitably qualified IFAs and many are wary of the high-risk nature of the advice required.

The average age at which people require equity release is in their 70s. By this time, many have lost touch with their adviser, if they had one, may have retired and, if their business has been sold, a young adviser may well not consider the potential of the older client base.

Many organisations which remain in contact with customers – the banks and build-ing societies – which the elderly are likely to visit regularly, have yet to take an active interest in equity release. Furthermore, the credit crunch is likely to make high-street providers more conservative. The long-term drivers of the market present an opportunity for IFAs.

The Institute of Actuaries forecasts that the £1.1bn of new equity-release business written in 2006 will reach £2.4bn by 2010.

The predictions are based on three main factors. First, an ageing population, second, pensioners are poorly provided for and thirdly, significant wealth is tied up in property.

There are presently more than 9.8 million people aged over 65 and by 2020 there will be an estimated 12.5 million people over 65 and by 2050, there will be nine million people over 75.

The increasing aged population is driven by two factors – increased life expectancy, which in 1981 averaged 78 and is forecast to increase to 87 by 2054, and, the baby boomer generation hitting old age.

However, the fortunes of pensioners are very mixed and we are increasingly seeing a polarised pensioner society. Some are well provided for, have their own property and a good final-salary pension, possibly in addition to other savings. Others, who own no property and are dependent on the state pension or a poorly funded scheme are much worse off.

There is a third group who are asset-rich, in that they own a property of significant value, but are cash-poor, in that their income may be limited.

In the main, however, older people are asset-rich.

Those who are now over 50 hold 80 per cent of the nation’s wealth and 70 per cent of retired people own their property outright. The aggregate wealth of pensioners now stands at over £1,100bn.

But inadequate private pension provision, the closure of corporate pension plans over the last decade, the demise of final-salary schemes and the failure of the state pension to keep pace with earnings and to pay anything other than subsistence have left many struggling for income and, for many, releasing equity is the only means they have of raising their standard of living.

The situation is made worse by rising energy costs. Newcastle Building Society recently calculated that pensioners face an inflation hike of 7 per cent this year, placing some in an extremely vulnerable position.

Interestingly, current market uncertainty should have limited impact on people using equity release.

Our experience shows that the initial demand to release money is not driven by house prices. That said, many clients will often request to release too much money in the belief that they need to put some aside for a rainy day. However, given the costs, it is the advisers’ responsibility to try to contain the amount removed initially and stress that they can always come back for more.

Similarly, the impact of the various different kinds of equity release, home reversion, fixed lifetime and roll-up lifetime, as well as the potential for impaired products must be clearly illustrated. Not only is longevity increasing but, on average, people underestimate their mortality by five years – this is why we illustrate to age 100, to ensure the full picture is given.

It may be that some advisers who have clients who might benefit from equity release are reluctant to take on the extra regulation. Such advisers may well consider referring their business to a specialist, enhancing their earnings and helping their clients.



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