By Rachel Terry and Richard Gibson.
Many older people who own their own homes face a dilemma. Although they are asset rich, they can also be income poor. They can trade in some of their assets by releasing equity on their property. But to do so is fraught with difficulty and the trade in involves risk. The authors describe what is being done to simplify the process and limit the risk.
What’s the issue? Around a million older home-owners have at least £100,000 of housing equity, yet their incomes are so small that they qualify for means-tested benefits1. If these people could draw on their housing equity easily and safely they could afford practical help which would improve their quality of life and make it possible for them to continue to live in their own home.
The Joseph Rowntree Foundation (JRF) has been working with interested local authorities, the equity release industry and their representative body SHIP2, and voluntary bodies representing older people, and taken advice from relevant government departments including the Department for Work and Pensions (DWP), to find a solution.
Three local authorities are now piloting equity release schemes, to be independently assessed by JRF. These are expected to run until summer 2011. Key features of the pilot schemes are:
• The involvement of the local authority in drawing attention to the scheme and providing training for those likely to be talking to older people about it;
• The availability of relatively small sums (compared with other equity release loans), which can be drawn upon on demand, thus broadly matching the sums needed;
• Minimising the risk of adverse effect on entitlement to benefits, by allowing initial drawings well below the savings threshold at which adverse effects begin and by allowing further drawings on demand; and
• Ensuring that financial solutions other than equity release are examined, including checking that the customer is claiming all the benefits to which they are entitled.
• JRF wanted an equity release product to be developed for home-owners on Pension Credit so that relatively small amounts
would be available, without adversely affecting their benefits.
• JRF set up the Equity Release Task Group to nurture development of such a product without public subsidy.
• With the help of the trade body, SHIP, Just Retirement offered
to develop a suitable commercial product, the Home Cash Plan, for piloting in collaboration with local authorities.
• Three local authorities are running pilots, helping older home-owners to decide what options they might consider to resolve their financial concerns.
• Where the older home-owner decides to explore equity release, theywould be told to consult a regulated financial adviser who would ensure they were claiming all benefits to which they are entitled.
They would also be told that one regulated adviser, Just Retirement Solutions, had access to the Home Cash Plan developed especially for the pilot scheme.
The pilot schemes at a glance
The pilot schemes are taking place in:
• The Royal Borough of Kensington and Chelsea
from November 2009;
• Maidstone Borough Council from January 2010;
• The London Borough of Islington from January
A special equity release loan, the Home Cash Plan, has been developed for the pilot schemes by the equity release provider, Just Retirement, at fees significantly less than typical in this market.
There are local variations in the ways the pilot schemes are being run. These reflect the wider aims of the authority and local practicalities, but the general approach is on the following lines:
• Initial contact with people is likely to be mainly through the local authority and local voluntary bodies. They would discuss a wide range of possibilities without offering advice on any particular product.
• If someone wants to examine equity release more fully, they would be told to consult a regulated financial adviser. They would also be told that the regulated financial adviser, Just Retirement
Solutions (JRS), has access to the Home Cash Plan, available only under the pilot scheme.
• If the person consults a regulated financial adviser such as JRS, they would have their financial position and needs examined in detail.
This examination would draw attention to a range of ways in which their needs might be met, including claiming all the benefits to which they are entitled. If they chose to consult JRS, and if JRS recommended the Home Cash Plan as the most appropriate for them, an application for the Plan would be made to Just Retirement3. Clients would be strongly advised to involve family or friends. They are also required to consult their own solicitor
before committing themselves. JRF is undertaking an independent assessment of the pilots and expects to publish the assessment report in autumn 2011.
The pilots will be deemed successful if they have helped older home-owners raise extra funds needed, whether they do so by increased benefits, help from family, or by taking out a Home Cash Plan.
About this Solution
Part 1 of this Solution looks at how the product was developed, how the three pilot authorities devised their schemes, and how the assessment will be carried out.
Part 2 provides a toolkit for local authorities interested in pursuing equity release schemes in their own areas
Part 1: Developing an equity release product
What’s the issue?
Decades of growth in home-ownership mean that almost three-quarters of retired households in England now own their home. But a significant number of these older home-owners have little income, even though they may live in a valuable property. Around a million older people who own their home are “income poor” despite being “asset-rich”; their incomes are so low that they qualify for means-tested social security benefits, yet they have at least £100,000 of housing wealth.
Previous JRF evidence6 shows that older people wish to be supported to stay at home, but are often unable to have access to the type of help they want with perhaps gardening, pets and window-washing which can make such a difference to the quality of their lives. If these older home-owners could draw on some of the equity in their homes, they could afford the relatively modest extra cost of this additional help, and make it possible to live for longer in their own home.
They may need only perhaps £20-30 a week for help with shopping or gardening for example, but cannot afford this out of their very limited income of, typically, barely £200 a week.
What the barriers are
These older home-owners on low incomes currently face three major deterrents to drawing on the value in their home (‘equity release’):
• reluctance to reduce the amount they can leave to their family;
• anxiety that drawing on their housing equity is risky, not good value for money, and complicated;
• concern that it may reduce their entitlement to means-tested benefits, thus making it not worthwhile.
Reluctance to reduce inheritance
Reluctance to reduce the amount that can be left reflects individual priorities. There is evidence that concern about inheritance is greatest amongst the “oldest-old”, with the “younger-old” showing noticeably less concern7.
Anxiety about equity release
Anxiety about pursuing equity release is widespread. Equity release is very widely known about among older home-owners but, when surveyed in 2004 and 2005, around half of them do not trust the deals, and/or the providers, so rule it out.
The perception that equity release is not good value for money arises largely from the interest rates on which such deals are based.
Equity release contracts normally run for many years; the relevant interest rates are based on the corresponding long-term rates in the market. These are normally higher than the short-term rates governing savings and the interest on variable rate mortgage loans. Currently, the gap is particularly large as short-term rates are at an all-time low and the interest rate on an equity release loan is for the life of the deal, which could be for more than 25 years.
Additionally, almost all equity release transactions provide a guarantee that the amount to be repaid will never exceed the proceeds from the sale of the property; this additional risk for the lender has to be allowed for in what is charged.
It appears that improved consumer protection introduced over the last few years is not widely known about. The sale of equity release products is now governed by detailed requirements of the Financial Services Authority (FSA). These are significantly more extensive than those applied by the FSA to the sale of mortgage loans for house purchase.
Additional consumer protection is provided by the code of conduct12 required of equity release firms that are members of SHIP (which account for about 90 per cent of the equity release market).
Effect on means-tested benefits
Older home-owners on low incomes are right to be wary of adverse impacts on their entitlement to means-tested benefits if they conclude an equity release deal. They could conclude a deal that provided them with a regular additional income, but this would typically lose them similar sums in Pension Credit, leaving them worse off. If instead they drew a lump sum, and added it to their savings, this too could lead to reductions in their Pension Credit, if it took their total savings beyond £10,000. Structuring an equity release arrangement that has little or no adverse effect on entitlement to benefit has been possible, but far from straightforward.
JRF’s Equity Release Task Group and its working groups brought experts together to overcome barriers to equity release that had been identified in earlier JRF research. This independent forum, with its targeted focus, achieved results by getting the right people together from the public, private and voluntary sectors in a timely way. JRF consultants acted as facilitators throughout the process and helped to maintain the momentum.
Once local authorities took an interest in piloting an equity release scheme, the private sector was prepared to invest time in developing an appropriate product. With an embryonic product in place, DWP officials were able to scrutinise the details and offer
comments on implementation to minimise the risk that customers could lose benefits.
With an appropriate product to discuss, which met the specification drawn up by the working groups, the local authorities approached local voluntary organisations for their support. All the pilot authorities are working closely with voluntary organisations to make the scheme known to local residents. The toolkit in Part 2 gives other local authorities an indication of the pilot authorities’ practical experience so far.
The pilots will find out whether negative perceptions to equity release can be overcome by the combination of reassuring involvement of the local authority and voluntary organisations, the offer of an introduction to a regulated financial adviser, and an equity release product designed especially for home-owners on Pension Credit.
The pilots will be deemed successful if they help older home-owners to raise the extra
funds they needed, whether they do so by increased benefits, help from family or taking out an equity release loan. JRF will publish an assessment report in autumn 2011.
If this demonstrates that obstacles have been largely overcome, it is hoped that other local authorities will decide to pursue equity release schemes.
Further information is available from the Joseph Rowntree fFundation at: http://www.jrf.org.uk/sites/files/jrf/equity-release-plans-summary.pdf