Pensioner poverty – is equity release the answer?

Providers are hailing it as a solution to pensioner poverty but retirement planners are taking a more cautious approach to using equity release in this way. Maryrose Fison takes a closer look at what advisers need to consider when advising on these products.

For many pensioners, surviving on a paltry income is a day-to-day reality. Two million people aged over 65 currently live below the poverty line on a single person weekly income of £124 per week or £214 for a couple in Britain.

With life expectancy rising and pensioners’ savings increasingly eroded by low interest rates and high inflation, it is little wonder that retirement planners are now facing more queries about equity release.

The number of equity release plans sold in the first half of this year rose by 5% compared to the last half of 2010, according to Key Retirement Solutions; with 10,448 plans sold between January and June 2011.

However, as with all financial products care must be taken to ensure the product is the right one for that client’s circumstances.

Retirement planners interviewed in this feature all believe that while equity release can have a role to play, it should only be offered once all other options have been explored.

Clive Barwell, head of later life services at Towergate Financial and who is qualified to give equity release advice, says there are important factors to consider before recommending equity release.

“My first line of approach on equity release would be ‘don’t’ because it can do so much damage to the client’s family’s eventual inheritance. This is why we would always try to find an alternative route,” he says.

To illustrate the effect the product can have on a client’s family’s future inheritance, Barwell uses the following hypothetical example.

“If a client takes out a lifetime mortgage equity release product to borrow £40,000 and is charged a typical rate of interest of 7% on a compound rate, in eleven years the debt will have doubled to £80,000 and in 22 years, it will have quadrupled to £160,000. This initial loan could therefore wipe out an inheritance worth four times the amount.”

While the value of houses can rise, meaning some of the increase in the value of the loan could be offset, recent years have shown house price growth is never a given. House prices fell by an average of 2.5% in 2010, according to the Land Registry rising to more than 7% in the north east of England.

With home reversion plans, the other main kind of equity release product on the market, there are also issues to be taken into consideration.

Under a standard home reversion plan, a client will sell a proportion, or all of their property in return for a lump sum and a guarantee that they can continue living there until they die or go into care.

The downside is that the lump sum will be worth substantially less than the proportion of the property being sold because the provider takes into account the fact the client will continue living there, potentially for many more decades.