Adviser guide to equity release

Transcription

1 April 2016 Adviser guide to equity release Section 1: Introduction to the equity release market The Adviser Guide to Equity Release is a guidance framework only. Advisers must always refer and adhere to the regulatory regime set out in the Financial Services and Markets Act 2000, and the FCA Handbook. Use of this guide does not alleviate any responsibility or obligation to follow the regulatory regime set out in statute and secondary legislation. For more information on regulatory standards, please contact the Financial Conduct Authority, or visit their website The Equity Release Council will not be held responsible for regulatory breaches incurred by firms relying on this guide for FCA compliance purposes. Created and sponsored by Retirement

2 Contents The future of equity release funding and the role of equity release 3 Welcome to the adviser guide to equity release 5 The market at a glance 6 Product types 7 Consumer protection 10 Equity Release Customer groups 13 Property growth 15 Qualification routes 16 The Equity Release Council : Adviser Guide 2

3 The future of retirement funding and the role of equity release The 2014 Budget saw major changes to how retirees can access their pensions. Prior to this announcement, around three quarters of people reaching retirement age purchased an annuity, which provided a guaranteed income for life. The reforms have provided an unprecedented amount of flexibility for retirees in how they access their savings. But they also provide the potential for people to make financial decisions which may lead to poorer outcomes later in life. With this in mind, the Government set up the Pension Wise service to offer people access to free, impartial guidance on the options open to them when they retire. Pension Wise providers do not make recommendations, but help people to ask the right questions 7. The Council s overriding concern since the announcement has been to ensure that the guidance is wider ranging and encourages people to consider all of their options for funding their needs later in life including housing wealth and that it signposts people to regulated financial advice where this is necessary. We welcome the principles-based standards developed by the FCA, to underpin the guidance. The guidance provided should help people to make informed choices, helping them to take into account issues such as investment risks, and the fact that it is difficult for anyone to make an accurate estimate of how long they will live. If anything, many people at the beginning of their retirement underestimate their life expectancy 8, leaving a risk that they will run out of money before they die so the guidance needs to help them secure a sustainable income that will not run out. The FCA s standards are heavily focused on defined contribution pension savings as the main source of income in later life 9. Although they do suggest asking whether the customer is a home owner or a renter, there is no prompt to consider proactively how housing wealth could provide additional resources to support people in later life. While we appreciate that the initial aim of Pension Wise was to help people make decisions about their defined contribution pensions and not their assets or wealth, as the service becomes more established, people should be encouraged to consider all their options. Increasing numbers of over-55s are looking to draw upon the wealth contained within their home to achieve financial security and stability in later life, with some two thirds of equity release products sold being for drawdown rather than a single lump sum 10. The Pension Wise service should take this into account. Dominic Lindley, a member of the Financial Services Consumer Panel and formerly of Which?, giving evidence at the Pension Schemes Bill Committee in 2014, noted that for one family in four, defined contribution pension savings make up only 4% of their total household wealth 11. Our spring 2016 Equity Release Market Report showed that in the second half of 2015, the average amount of housing wealth held by customers was 264,397 for those choosing lump sum lifetime mortgages and 301,971 for those choosing drawdown products. The average amount lent under an equity release policy was 81,324 for lump sum products, and 49,607 through drawdown products with an additional 36,668 reserved for future use. To put these figures into context, the average single defined contribution pot is 25, See 8. See research from Aviva: 9. Principle based standards: Equity Release Market Report Sping 2016: Financial Services Consumer Panel Report 2014 The Equity Release Council : Adviser Guide 3

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5 Welcome to the adviser guide to equity release In light of equity release's growing recognition from UK consumers, regulators and politicians that housing wealth can and should play a greater role in financial planning for retirement, the Equity Release Council would like to present you the adviser guide to equity release. This guide would not have been possible without Pure Retirement's commitment to creating and sponsoring the project. This guide will help you when advising your clients on equity release and will not only show you the features of the available propositions, but also help guide you through the actual advice process. You will find information on market background, reasons to engage in this market, and what qualification routes are required in order to be able to advise on the product effectively. It is designed to give you a deeper understanding of the products, and the wider market, which will help you to become confident about engaging in this market, and in promoting the product's features and benefits to your clients. Equity release Many of your clients aged 55 or over who have retired or are about to retire may be finding that their capital and retirement income isn't enough to allow them to live the life they want. Unpaid mortgages/debts at retirement, and low interest rates (due to recession) offering savers limited returns are some of the factors affecting later-life income. In addition, mainstream mortgages for older people are less available. With the pension reforms introduced in April 2015 and the ability for clients to take out their pension savings as cash the need to supplement income through equity release is growing and more and more are looking to equity release as part of the solution to meet their needs, whether it be immediately, or at some point in the future. Over the last couple of decades, we have seen enormous growth in the property market, with homes now worth many times what were paid for them 20 or 30 years ago. In its simplest form, equity release is a way of releasing some of the money, or equity, stored up in your client's home, without needing to move. The amount which can be released depends on the property value, the client's age, health, lifestyle and individual needs. There are two types of equity release products a home reversion scheme, where your client is required to sell their home in full or in part, and may be required to pay a nominal rent in return for living there as long as they wish, or a lifetime mortgage, which is currently the most popular type of equity release product. Lifetime mortgages come in several forms but in the main are either Lump Sum products or Drawdown products, together accounting for 99% of the market*. Drawdown allows people to access their housing wealth in instalments, and can provide an additional source of regular income as well as with meeting one-off costs. Lump Sum products typically involve a larger withdrawal up front, which might be used for bigger items of expenditure such as clearing an existing mortgage or other borrowing. Home reversion products used to be the primary product for equity release, but at less than 1% of the market* have been eclipsed in recent years by the flexibility and enhanced loan to value rates of some lifetime mortgages. A home reversion is, in essence, the sale of the property for less than the current market value to the plan provider. In return for the sale at a discounted rate, the reversion product provider gives the original owners a secure lifetime tenure in the property (either through a lifetime lease or trust deed). Historically a home reversion product could benefit customers by offering significantly more money than a lifetime mortgage. This differential has waned in recent years due to the existence of enhanced lifetime mortgages taking into account customer s ill-health similar to the enhanced annuity market. *Source: Equity Release Market Report, Spring 2016 The Equity Release Council : Adviser Guide 5

6 The market at a glance The latest Equity Release Market Report shows that the over-55s appetite for unlocking their housing wealth continues to grow across the UK. The retirement landscape has changed considerably after the arrival of the pension freedoms on 6th April 2015 and the introduction of the first part of the Care Bill This is giving people new options to consider for funding later life, but at the same time, it remains a challenge to amass the savings needed to support a comfortable retirement. Equity release can play an important role for many in helping to achieve this. It therefore makes sense for any conversation about financial planning for retirement to consider the role that housing wealth can play Average withdrawal Average lump sum Average takehome weekly full-time pay Equivalent weeks' pay (drawdown) London 72, , South East 44, , South West 34,349 78, UK 49,607 81, East of England 23,902 74, West Midlands 25,214 61, East Midlands 24,137 60, North West 25,266 57, Yorkshire 23,646 52, North East 25,548 51, Wales 19,420 51, Northern Ireland 13,172 42, Scotland 19,616 39, Equivalent weeks' pay (lump sum) In addition, the sector has seen Legal & General enter the equity release market in The prospect of more new providers and products entering the market - as well as different funding options helping providers to develop their product portfolios - will introduce further innovation. One example is the option to make interest payments throughout the life of a loan, which will ensure the market can satisfy wider demand. 12 Review Highest London: 209.7k avg lump sum Lowest Scotland: 39.8k avg lump sum As more people are attracted by the possibilities offered by equity release, it is vital that efforts are made to maintain the standards of financial and legal advice across the sector, underpinned by appropriate regulation and The Council s own Statement of Principles and associated Rules and Guidance These standards are crucial to maintaining the positive outcomes enjoyed by the vast majority of customers, based on an understanding of how equity release works and the situations in which it can be of benefit *Source: ERC Market Report, Spring 2016 The Equity Release Council : Adviser Guide 6

7 Product types There are two main types of products Home Reversion products and Lifetime Mortgages What is a Lifetime Mortgage? A Lifetime Mortgage allows your clients to borrow a set amount of money against the value of their home, which can be paid in the form of either a lump sum or to draw down money as and when they need it. This can be a useful facility, as it is impossible to accurately predict what your client may need to finance in 10 or 20 years' time. When it comes to retirement your clients may be looking for flexibility that fits their long term income and lifestyle needs as well as the one off expenditures such as repaying an existing mortgage, home improvements, special purchase or gifts to family. That's why many products have a range of flexibilities such as further advance, having a facility to draw down against (usually after an initial amount has been taken) the ability to allow regular repayments (Interest only) and ad hoc repayments (usually up to 10% per year) as well as features such as protecting a proportion of the property for inheritance purposes. What is a Home Reversion Product? A Home Reversion product allows your clients to access part of the value of their property while retaining the right to remain in their property, rent free, for the rest of their life. With a Home Reversion product the provider will purchase all or part of their house taking into account their age and their health and will provide them with a tax-free cash lump sum (or regular payments) and a lifetime lease, guaranteeing them the right to stay in their property rent-free for the rest of their lives. There is no day-to-day interference and no restrictions on treating the house exactly as before; as a private home to live in freely. The percentage they retain in their property will always remain the same regardless of the change in property values, unless they decide to take further cash releases. At the end of the product plan their property is sold and the sale proceeds are shared according to the remaining proportions of ownership. With a Home Reversion product it is possible to give a homeowner some certainty in their future finances. With a Home Reversion product the client knows precisely what he/she has parted with and, equally, what has been ring-fenced for later use, possibly to leave in a Will. The Equity Release Council : Adviser Guide 7

8 Home Reversion products offer the following; 1. Lump Sum products only 2. Possibility of further advances 3. No interest calculation 4. Simplicity Minimum age limit 65 years with often no maximum. Minimum property value from 120,000. Minimum release is 30,000. Reversion products are not loans, and involve the sale of all or part of the customer s property for less than the market value. In return, the customer gains the right to reside in the property for the rest of their lives. As this is a straight sale of the property, there are no interest rates to worry about. The customer will benefit from the increase in price of any of the percentage of the property they retained. If the customer sells 100% of the property (100% reversion) they will not benefit from any property price increase. These products traditionally offer more money than lifetime mortgages, but are less flexible. If the customer wishes to ring-fence a percentage of their property to be left to their children, a home reversion plan would ensure this. The Equity Release Council : Adviser Guide 8

9 Lifetime Mortgages offer the following; 1. Lump Sum products 2. Drawdown products 3. Interest only products 4. Impaired life products (Lump Sum and Drawdown) Minimum age limit 55 years with often no maximum. Minimum property value from 60,000. (some lenders have a maximum property value) Minimum loan amounts are often from 10,000. Maximum loan amounts can apply but range up to 4,000,000. (although 750,000 is the norm) Minimum additional loans start from 1,000. All loans carry an early repayment charge, of which many are linked to gilt rates but increasingly we are seeing more and more on a fixed rate decreasing over a set period of years to zero. This does not however mean that people always have to pay an ERC. For those clients who require a large initial loan or drawdown facility, some lenders offer high value loans for a higher rate. The flexibility offered by today s products mean that they can be more easily adapted to a client s lifestyle requirements and retirement plans linking in with their planned changes to income throughout retirement right through to needing to pay for long term care. These flexibilities can: Give client control and freedom over when and how they borrow money. No time limit on cash drawdowns. No minimum waiting period on further borrowing. Facility can be either linked or not linked to initial loan taken. The upper limit on loans is determined by an agreed LTV. Further drawdowns are NOT subject to additional valuations or underwriting criteria. (Note: This option is subject to maximum limits and under certain circumstances the facility of further withdrawals could be restricted). Rate paid by your client depends on the level of flexibility they require and the value of the loan they take out. High value lump sum and drawdowns may have a slightly higher rate. Current property market the increases in property values over the past few decades means that your clients' home is now worth many times what they paid for it. The Equity Release Council : Adviser Guide 9

10 Consumer protection Statement of Principles Equity Release Council Equity release customers enjoy three levels of protection, encompassing a structured financial advice process, face-to-face legal advice and product safeguards set out in the standards. The Council s Standards Board oversees the Statement of Principles and standards which members sign up to, instilling confidence in their products and advice. This ensures customers: Receive fixed interest rates for lifetime mortgages, or, if they are variable, there must be a cap (upper limit) which is fixed for the life of the loan. Retain the right to remain in their property for life, provided the property remains their main place of residence. Receive a no negative equity guarantee so they will never owe more than the value of their homes or leave any debt behind regardless of changing property prices. Receive fair, simple and complete presentations of the products they are considering taking out including any benefits and limitations of the product, and obligations they must adhere to. They will be given information about: all the costs that they will have to bear in setting up the plan; the tax implications; what will happen if they wish to move to another property; and how changes in house values may affect their plan. Have the right to choose an independent solicitor of their choice to carry out associated legal work. Have the right to move their product to another property deemed suitable by the lender without being subject to any financial penalty. Receive a certificate recognised by The Council and signed by their solicitor, which clearly states the main cost to the householder s assets and estate for example, how the loan amount will change or whether part or all of the property is being sold. The Equity Release Council : Adviser Guide 10

11 Equity release and advice All equity release products are required to involve independent advice. In addition to their regulatory responsibilities, adviser members of The Council are required to undertake the following with customers as part of the advice process: 1 Fully discuss alternatives to equity release including trading down, grants, use of savings and pension income, financial assistance from any family member both for the current point in time and how any of these alternatives may be relevant in the future. 2 Establish or refer for investigation the customer s eligibility for state benefits and the effect equity release benefits may have on them. 3 Consider the customer s tax position in making a recommendation. 4 Ensure that the customer is advised to speak to their family and any other material beneficiaries of their Will, and to consult an independent legal adviser. 5 Discuss the customer s health and life expectancy and take into account the effect of positive and negative changes in house values. 6 Explain the impact on their Will and estate planning and how any released funds may impact on their ability to fund later life financial requirements such as long-term care funding. 7 Prior to or with any recommendations, provide the customer with a fair and balanced overview of the pros and cons of both lifetime mortgages and reversion products, taking into account the customer s current and future financial status. 8 Be sure the contract recommended is the most suitable lifetime mortgage or reversion product and advise that any other outstanding mortgage will need to be redeemed before the lifetime mortgage contract can be entered into. 9 Explain clearly that it is inadvisable that the funds released are reinvested into any medium or long term investments. 10 Fully explain all fees and risks associated with the product recommended, for example: the impact of any compound interest; any early repayment charges; the opportunity to move the mortgage in the future will be restricted to properties acceptable to the lender. This may rule out moving to age-restricted or sheltered accommodation, depending on the lender s policy at the time. If the product is a reversion, fully explain the risk of not receiving the full market value for the percentage sold; or if the product is not from an Equity Release Council member and does not comply with the Equity Release Council s Statement of Principles, explain what protections the customer is foregoing. 11 Review the customer s needs and objectives, future plans and ongoing commitments including moving home. This includes income requirements as well as property maintenance and insurance. 12 Ensure that the amount released is appropriate for the customer s current and future requirements (if Drawdown). This includes debt consolidation, if applicable. 13 Check if the customer has put together a realistic expenditure budget plan for the funds released. This includes making use of drawdown facilities, if applicable. Give the customer a copy of the Suitability Report, outlining all of the information in 1-13 above, and confirm their receipt and acceptance of it. The Equity Release Council : Adviser Guide 11

12 Why engage in the equity release market? Rising life expectancy and longer retirements mean that there is increasing pressure on pension funds to supply the necessary income for your clients to enjoy life to the full throughout retirement. How many of your clients do you estimate are actually retiring on maximum pension? Although most people will receive some state benefits, the old concept of depending solely on these in retirement is now old-fashioned, and in some cases, defunct. Today's average pension fund size (after tax-free cash) is only 26,000* which does not buy a sizeable annuity and with pension freedoms some are choosing to take it all as cash reducing yet further the income they will have in later life. No wonder then that today's pensioners are looking to alternative sources to fund their retirement needs. *Source: Typical Lifetime Mortgage customer base Most of our equity release customers are aged 55 to 85, with an average age of 71 when an equity release product is taken, however as more and more product innovation comes through and products become more and more flexible to the retirement needs of the consumer, we will see an ever changing typical equity release customer. Some using equity release for the more traditional uses and others as a source of retirement planning alongside pension income and investments. Typical motives behind the purchase tend to be related to: The need for a more comfortable life: Pay off outstanding mortgages, debts and bills. Necessary home improvements. Income replacement. The desire to do the things they want to: Holidays. Luxury home improvements e.g. extension, conservatory. Helping out the family: Money for children. Money for grandchildren. The Equity Release Council : Adviser Guide 12

13 Equity Release Customer groups Extensive customer research and analysis of customer response data identifies three broad customer groups* for lifetime mortgages: Customer groups Segments Group 1 Group 2 Group 3 Characteristics Low incomes, little retirement savings White collar, company or private pension savings Senior managers, more financially astute Age Lifestyle Still live in family home, likely to require benefits, day to day living, have a mortgage in retirement Still live in family home, may be working part time, want to enjoy retirement, family supportive Maintain lifestyle into retirement with travel, big ticket spends, IHT planning, children financially self-sufficient Attitude View home as main asset, financial language a barrier to purchase Sufficient savings for the basics of life, but not the things or lifestyle they want Sufficient pension income but want to maximise their estate Messaging Clear debts and ease income burden, cost efficiency of drawdown proposition. Education. Mitigate concerns through Q and A s Flexibility of drawdown proposition gives you access to funds when they need it Possibilty of IHT mitigation, use ER as part of retirement planning Proportion of market 45% 45% 10% Housing equity Recent research tells us that 61% of single pensioner households have a total pension income of less than 10,000*, and 45% of couple pensioner households have a total pension income of less than 15,000*. Meanwhile, 83% of over 55's agree that they think it is important to stay in their own home during retirement. There are many reasons for this, including sentimental reasons it is the house their children grew up in, or they have a good circle of friends nearby or that they simply do not want to move, but bearing in mind that even though house prices have fallen recently, the value of property has grown by up to 200% in the last 10 years*. It makes sense to look at the variety of options on offer. Almost 80% of people aged own their own homes*. Estimates for the total level of equity in older people s housing are as high as 1.4 trillion*. This provides a large potential source of funding for things which may make life easier for older people. While some people may choose to downsize in later life, many people will prefer to stay in their own home, and equity release allows them to unlock money from their property. *Source: Office For National Statistics Census 2011 The Equity Release Council : Adviser Guide 13

14 The UK s growing older population There are now 11.4 million people aged 65 or over in the UK. There are over 23.2 million people aged 50 years and over, over a third of the total UK population. There are now 14.9 million people in the UK aged 60 and above. 1.5 million people are aged 85 or over. In 2010, approximately 640,000 people in the UK turned 65; in 2012, it the figure was about 800,000. The number turning 65 is projected to decrease gradually over the next 5 years to around 650,000 in There are now more people in the UK aged 60 and above than there are under 18. The number of centenarians living in the UK has risen by 73% over the last decade to 13,350 in When asked what stage of life they were currently in (given choices), 55% of year olds said later life or old age, but 43% of them said middle adulthood. For year olds, the split was 75% later life and 23% middle adulthood. Demand for long-term care funding is increasing, specifically, with regards to dementia where sufferers are to double by Yet people s ideas of when later life started were quite early: in the year old group, men said age 61 and women said 64; in the 65-69s, men said 62 and women said The number of people aged 60 or over is expected to pass the 20 million mark by The number of people aged 65+ is projected to rise by nearly 50% (48.7%) in the next 17 years to over 16 million. The proportion of people aged 65+ will rise from 17.7% currently to 23.5% in The percentage of the total population who are over 60 is predicted to rise from 23% at present to over 29% in By 2086, about one in three people in the UK will be over 60. The number of people over 85 in the UK is predicted to more than double in the next 20 years to nearly 3.5 million. The population over 75 is projected to double in the next 30 years. Nearly one in five people currently in the UK will live to see their 100th birthday (see section on life expectancy below). However, according to the National Statistician, the UK s population is ageing more slowly than other comparable counties within the older population. 3.5 million 65+ live alone. This is 36% of all people aged 65+ in GB. Nearly 70% of these are women. 2 million people over 75 live alone; 1.5 million of these are women. 58% of widows (women only) are aged 75 and over. The Equity Release Council : Adviser Guide 14

15 Black and minority ethnic (BME) groups make up over 16% of the population of England, but 8% of people in England aged 60 and over. Government estimates that between 5 and 7% of the UK population are lesbian, gay or bisexual. On this basis, we estimate there are between 600,000 and 840,000 LGB people over State Pension Age in the UK. It is estimated that there are 14 million grandparents, 1.5 million of whom are under 50. An estimated 88 per cent of people aged 65 and over give their religious affiliation as Christian, and 8% No religion. Source: Age UK fact sheet on Later Life in the UK September 2015 Growth of average UK property values since 1973 House price growth based on a 10k house in 1975 Value of 10k house in yrs average annual growth rate On average in the UK, a property worth around 10,000 in 1975 is worth almost 250,000 today! Source: Nationwide housing index, Q The graph above shows how the value of a property in 1975 has grown and what average percentage growth we have seen over the the last 20 years. Compared with pension income it is of no surprise as to why property has become such an important factor in assessing someone s wealth and therefore having the ability to access as a part of a client s retirement planning is crucial both to the client but also to the country as a whole as it seeks to satisfy the needs of an ageing population and the costs of delivering pension income and future care costs. The Equity Release Council : Adviser Guide 15

16 Qualification to advise on equity release and achieve permissions Since 6 April 2007, all new equity release advisers will need to be fully qualified to offer advice on lifetime mortgages and/or Home Reversion products. The main routes for advisers are via the CII and IFS although there are other routes and a very many qualifications that can be grandfathered in if they were obtained prior to relevant regulatory dates. There are also qualifications that are no longer obtainable, but still enable holders to carry out advice on equity release business. The qualification route to advise equity release is straightforward and the routes are detailed below: Current and Legacy Qualifications Awarding Body Required Module Blocks Qualification Chartered Institute of Bankers in Scotland Mortgage Advice and Practice Certificate - Paper 1 and: Equity Release Mortgage Advice and Practice Certificate ERMAPC Chartered Institute in Securities and Investments (CISI) Fellow or Associate with the module: Certificate in Investment and Financial Advice Fellow or Associate Chartered Insurance Institute (CII) Certificate in Mortgage Advice Certificate in Advanced Mortgage Advice CII CMA (sometimes referred to module number) Certificate in Equity Release (formally called Certificate in Financial Planning and Lifetime Mortgages) CII CER (sometimes referred to module number) Mortgage Advice Qualification (MAQ) plus entry requirements MAQ IFS University College Cerificate in Mortgage Advice and Practice CeMAP Certificate in Regulated Equity Release CeRER If you choose not to qualify, you still have the option to take part in a Referral Service. Section 2: Market Background and Marketing Approach Back to main menu The Equity Release Council : Adviser Guide 16

17 Created and sponsored by Retirement 3rd Floor, Bush House, North West Wing, Aldwych, London WC2B 4PJ Tel : THE EQUITY RELEASE COUNCIL IS A TRADE ORGANISATION THAT REPRESENTS THE EQUITY RELEASE INDUSTRY. NOT ALL PROVIDERS, ADVISORS, SOLICITORS OR SURVEYORS ARE MEMBERS OF THE COUNCIL. TO MAKE SURE YOU ARE DEALING WITH A GENUINE MEMBER LOOK FOR THE LOGO AND SEARCH OUR WEB SITE UNDER MEMBERS DIRECTORY. THE EQUITY RELEASE COUNCIL IS NOT AUTHORISED TO GIVE OR OFFER ADVICE TO CUSTOMERS. The Equity Release Council, formerly Safe Home Income Plans is a company limited by guarantee and registered in England No The company is not authorised under the Financial Services and Markets Act 2000 and is therefore unable to offer advice.