Hidden wealth can be unearthed via not-so-hidden products

70% of pensioners own their own home. This accounts for £1.1 trillion pounds of wealth. If only there was a financial product that enabled those pensioners to access some of that wealth?

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Bob Champion | Air Later Life Academy
9th July 2020
Bob Champion LLA Later Life Academy
"Let’s tick the boxes of the product homeowners may be looking for, but do not know it already exists."

Without such a product, to access it, they would have to move to another house. This would incur transaction costs such as estate agent fees, stamp duty, surveyor and solicitor fees. That also overlooks the emotional costs and stress of moving to a new house.

The alternative would be to mortgage the house. The problem with this solution is that the pensioner will have to take on debt; pay interest which itself includes a mortgage interest rate risk; reduces net income and spending power; and have the means to eventually repay the mortgage. Not very practicable for many pensioners. They need a financial product that enables them to withdraw wealth from the property without the obligations a mortgage brings.

What would that financial product look like? Ideally, there should be little or no up-front costs incurred by those buying it. There should be no need to pay anything from the pensioner’s income, and there should be no future risks or liabilities incurred by the product purchaser. Also, the product needs to be flexible, in that it could be transferred should the purchaser need to move house.

Then the purchaser may wish to buy themselves out of the product in the future, should thy receive an inheritance or their circumstances change. Alternatively, the purchaser my wish to gradually reduce their exposure to the product.

I’m of course being flippant here because as we all know that product exists and goes by the name of equity release. However, just because we know that, it doesn’t mean older homeowners do.

And then, of course, we have to explain the nuances and the differences. ‘Equity release is a mortgage’, comes the charge. Which of course, it is, but not as the general public understand it. The public’s understanding of a mortgage is as I describe it above.

So, let’s tick the boxes of the product homeowners may be looking for, but do not know it already exists.

There are little or no up-front charges payable by the consumer. The pensioner pays nothing from their income. All equity release plans provided by Equity Release Council members come with a ‘no negative equity’ guarantee. The interest rate is guaranteed for life.

So, for example, Fred releases 25% of the value of his £200k house. At a 4% interest rate it will take 36 years before the amount borrowed with accrued interest will be £200k. What will be the value of the house in 36 years? If house prices increased by just 1% per annum, his house would then be worth £286k, and at 2% £408k. Also, depending upon Fred’s age, what is the probability of him living another 36 years?

Many of those who are approaching retirement are having their retirement plans disrupted; they are having to stop work early; they are seeing a dilution of earnings resulting in reduced pension contributions; and investment plans missing their targets.

But it is not just them. Their children and grandchildren may require help from the Bank of Mum and Dad. Their plans may have also been thrown off track by changes in the employment market.

My description is of a ‘basic equity release’ product with no ‘bells and whistles’. There are many options and variants available. In fact, when I last looked there were 233 equity release plans on offer.

This range of plans offers inheritance protection, differing early repayment terms, and even some where the terms of the plan are based on health. There are lump-sum plans, drawdown plans, and even income plans. Because of these options, it’s a sector which undoubtedly needs an expert adviser to take the homeowner through the process and options, and to find the correct plan that is tailored to their needs.

The equity release expert also has to be aware of the impact of the plan on benefit entitlements, care funding and the tax advantages of using the product.

It therefore makes perfect sense for retirement income planners to either be that expert themselves, or to have access to one, so as to ensure they are considering all the possibilities available to their clients when creating their retirement income plan.

We hear a lot about holistic financial advice in the later life space, and there’s a very good reason for that. It’s absolutely required in order to ensure consumers have access to all the available options – ones they have heard of, and ones they didn’t even know existed.

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