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Release of life

Just Retirement marketing and product manager Nigel Barlow says equity-release plans have been labelled distress purchases but are becoming an integral part of retirement planning.

Figures from Safe Home Income Plans show that total money advanced to clients last year under equity-release arrangements topped 1.1bn.

Sales last year were only slightly better than 2003 but the growth rate in the market since 1998 has been huge. Lifetime mortgages dominate the market with a share of 96 per cent, according to Ship.

Equity release is increasingly recognised as a valuable part of retirement planning, enabling clients to supplement their pensions, make life a little (or a lot) more comfortable, make home improvements, provide for children or grandchildren or for inheritance tax planning.

Not so long ago, equity release was widely perceived as a distress purchase and this perception still prevails. More and more, however, the product is perceived as an integral part of the financial planning process at or during retirement.

Treating your house as part of a total portfolio, albeit a part in which you live, complements investment planning and allows much more flexibility and security throughout retirement.

Given the comments from various bodies over the past three or four years about the general shortfall in pension savings, it is predicted that equity-release sales will continue to grow rapidly in the next few years although perhaps not quite as quickly as in the past.

Estimates vary between the equity-release market growing by 2bn and 7bn a year. Obviously there are concerns about the nature of risk in this area but it is clear that appropriate products coupled with quality advice can go a long way towards solving the problems of many people.

Confidence is improving, aided by Ship and its code of conduct and by more well known names entering the market.

Reversion plan sales may benefit when regulation starts although many people may still be reluctant to sell all or part of their home despite being able to continue living in it. This is a shame since the plans can release higher amounts of cash or provide long-term income.

Roll-up mortgages account for the vast majority of sales. These plans are relatively straightforward and available from a range of big and small insurers and banks. Substantial cash advances are available, depending on age and, of course, interest is only repayable on death, unless the mortgage is redeemed before.

The roll-up of interest is a point highlighted by the Actuarial Profession Equity Release Report 2005. At current rates of interest, the client’s debt will double every 10 years.

Increasing life expectancy, therefore, could lead to clients having less money to pass on to their children than they may have expected. Negative equity is not an issue since providers of roll-up mortgages all offer an automatic no negative equity guarantee at all times although triggering the guarantee does mean that there is nothing left in the estate. In this respect, however, the no-negative equity guarantee could prove expensive for providers.

The report also touches on the likelihood of product development and innovation. Features such as increasing availability of further advances, drawdown and impaired life products are covered.

One feature which must be considered, given that a substantial proportion of cli-ents may be expected to live a very long time, is that their circumstances could change dramatically.

Advisers are familiar with the reluctance of people to consider the need for long-term care when they retire. This is often perceived as a remote possibility and certainly not as a priority but we see it as an increasingly significant possibility.

It is possible to use equity release to help pay for care when the client can remain in their home but existing equity-release clients may struggle to pay for extra costs if they have to move out of their home.

We are optimistic about the prospects for the market and we believe that providers which are focused on innovation and the needs of individuals can play a big part in helping advisers add significant value to clients and to their own business.

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