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Open the door to equity

Despite the growth of the equity-release market, only a handful of IFAs

specialise in it. The entry of Northern Rock, NPI, GE Life (through the acqu

isition of Stalwart Assurance) and Norwich Union has given substance to

this market and the customer base is developing fast.

These major names have raised the profile of the market and have dispelled

the clouds which have hung over it since the scandals surrounding the

misselling of roll-up mortgages n the l980s. It is no longer good enough

for IFAs to say these schemes are more trouble than they are worth.

It used to be said the flag followed trade. So it should be with IFAs. As

the population grows older and wealthier, so IFAs will increasingly

specialise in the particular problems and opportunities these demographic

changes introduce. For IFAs looking to increase their customer base, this

could be a very important market and one worth specialising in. Many of

their clients will have two parents living and, with divorce, this may

involve more than one home.

The over-70s own more equity in their homes than any other age group. Like

most homeowners, they have enjoyed amazing growth in house prices but,

unlike younger groups who have the capacity to save for their old age, it

is no longer easy for them to increase their income. The over-70s are

facing a relative decline in pensions, annuities and interest-bearing

deposits. The erosion in real income is making it progressively more

difficult for them to afford the increasing costs of good health,

maintaining their lifestyle – and enjoying it – and the expense of

long-term care.

The over-70s tend to be asset-rich, cash-poor. The obvious way to solve

this problem is through an equity-release scheme. This presents commercial

opportunities for IFAs to carve niche positions in this market, generating

introduction fees from scheme providers as well as the possibility of

advising on investing the lump sums created.

As the result of wealth creation over the last 20 years, many middle-aged

children are now many times richer than their parents. The old reason for

holding on to the family home because the parents wanted to leave something

behind has gone. There is now a growing concern within the middle-aged

generation to take financial responsibility for their parents. The more

their parents are independent, the happier their children are.

Many older folk want the money their homes might bring but do not want to

move. Retirement experts advise against moving away from friends and a

familiar environment. The solution to wanting money without moving is an

equity-release scheme which gives the seller a guaranteed rent-free

lifetime lease.

In the past, this market has been dominated by those living in cheaper

housing but we are being approached by more and more clients with

higher-value properties. The increase in property values has meant they can

release some capital from their home while still leaving something to their

children. You can do this through a partial release. Some people who

approach us feel no need to leave anything to their sons and daughters,

either because they feel their children are wealthy enough or because they

have lost contact.

There is also an inheritance tax aspect. All IFAs recognise the attraction

of an investment package which is tax-free. Since 1996, the nil-rate IHT

band has gone up by 15 per cent while house prices has gone up by an

average of 30 per cent and by many times that in some areas. Owners of

quite ordinary terraced houses in the South-east now fall into the IHT net,

even if they have no other assets.

Some homeowners are using equity release to distribute cash to their

children and cut their eventual IHT bill. They can do this without

incurring capital gains tax, provided it is their primary residence.

Thomson Financial Planning founder and consultant John Dyson says: “We

have beenusing these schemes for some time as a way of solving and avoiding

the inheritance tax problem. As more people fall under this tax and the

population gets older these schemes are an increasing source of new

business. However, few advisers understand these specialist products, which

creates opportunities for those who do.”

In the next 20 years, we can confidently predict that one in four

homeowners over 70 will have taken out some form of equity-release scheme.

IFAs who anticipate this trend and commit time and resources to advising on

equity release will be the ultimate winners.

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