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Cicero Policy BrieferIssue 7, December 2006
Ready, steady…but not quite go:
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By Roger Harding Senior Policy and Public Affairs Manager, Joseph Rowntree Foundation |
| “The chief barriers highlighted by the report and the feedback to it seem to be benefit withdrawal and start-up costs” |
This headline was the title of a Joseph Rowntree Foundation report published back in 2003, and many would agree that it seems as apt now as it was then. It is still a bold person who places a date on when the equity release market will expand to become a common option for home-owning pensioners.
But there is no lack of potential customers. Numerous reports have highlighted the demographic trend of increased pensioner households, often now with housing wealth in excess of their pensions. An ippr report 1 found that there are over 2 million pensioners entitled to the Pensions Credit with housing assets worth over £50,000. A number of JRF reports has highlighted that many of these people could benefit from releasing such housing equity to pay for works on their house or additional domiciliary care so that they live more comfortably in their home for longer, at some point in the future.
The JRF has recently published some work that attempted to understand and catalogue the barriers to these products being used by such lower-wealth pensioners 2. The report highlighted these as: continued mistrust of the product by consumers; a lack of help, guidance and advice; benefit withdrawal rates; high start-up costs; and some pensioners owning homes in low-demand areas or on leasehold. The report does highlight that the products now in the market are typically very competitive, that the FSA has been pleased at the way the industry has responded to the first, less than satisfactory, mystery shopping exercise and that it is the role of local authorities to reach people in low-demand areas. The chief barriers highlighted by the report and the feedback to it seem to be benefit withdrawal and start-up costs.
By the very nature of the Pensions Credit being means tested, and equity release increasing ‘means’, pensioners receiving this benefit face significant benefit withdrawal rates. This is most starkly highlighted by the Pensions Credit, but lower-income pensioners would also face potential withdrawal of other benefits and even the current care they receive courtesy of their local authority. But this could perhaps be overcome while maintaining the essential setup of the Pensions Credit in way that would be of small fiscal impact. The report concluded that the benefit should have a £3,000 income disregard, allowing pensioners to draw down income up to this value per year without it affecting their Pension Credit income. The cost of this to Treasury should be marginal as so few lower-income pensioners are using equity release at the moment in spite of the withdrawal rates. If this were expanded to cover all entitlements this could also have the further benefit of reducing the start-up costs as financial advisers would no longer need to conduct lengthy benefit checks for those withdrawing £3,000 per annum or less.
Which leads nicely to the other chief barrier: start-up costs. Arranging an equity release product for a lower-income pensioner is typically very expensive, particularly in relation to the amount of equity being withdrawn. It is not uncommon for the process to take over 12 months from the moment the customer contacts the financial adviser to the completion of the arrangement, caused by a combination of the need to consult family, check benefit entitlement, consider alternatives, consider the uses of the money, a valuation and allow the potential customers time to ensure they are comfortable with going down this route—and this is before one even gets on to product choice and suitability. And this is not even a guaranteed sale for the financial adviser. Rightly, the consumer can decide against it at any stage and it is therefore common for advisers to consider the option with a number of pensioners to gain a single completion.
The JRF has not become a foundation for the support of financial advisers—what’s important here is that the more resource intensive this process is for advisers, the more they need to charge in commission for each completion adding to the significant costs faced by lower income pensioners who cannot raise the funds for their needed care or repairs. Further, many of these potential customers will require support in considering these options and dealing with care and repair providers once the equity is released, particularly if they have no close friends of family to consult.
This led the authors of the report to conclude that much further serious consideration should be given to the provision of support and guidance. The local authority could provide that ‘trusted friend’ for those people who require someone independent to consult. A system of generic advice could ensure that when low-income pensioners do contact a financial adviser they have already considered all the non-product specific items, namely the alternatives, ensuring that if they go down the equity release route the process is reasonably swift, helping ensure that it doesn’t come at a prohibitive cost.
With these changes we may finally get to the ‘go’ for equity release, at least for the pensioners who need the extra income most.
Roger Harding is the Senior Policy and Public Affairs Manager at the Joseph Rowntree Foundation (www.jrf.org.uk).
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