Home funding retirement may be only option

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Equity release has had something of a blemished reputation in the past, but I wonder if, despite all its faults, it is time to review this product in the light of the pension freedoms.

There has always seemed to me to be a certain stigma attached to consideration of an equity release plan, but given the challenges many will face in retirement over the next 50 years, it may be time for some fresh thinking

I have asked several financial planners and advisers over the years why equity release did not have a bigger role in many people’s financial plans.

A home is, after all, often the biggest single asset many people own so why not make use of it in later years? I have heard many tales of elderly people shivering in large homes they cannot afford to heat, hanging on to their pile to pass it on to their children who perhaps do not really need the money. An irony if ever there was one.

Advisers usually blame their reluctance to recommend equity release on the view that there are better ways to fund retirement without losing the home. Maybe there are, for some, but for many, equity release may be the last throw of the pension dice if they are not to suffer retirement property rich and pension poor.

I suspect in many cases the emotional attachment to a home, which is perfectly understandable, is one of the main stumbling blocks. Many people who might consider equity release are concerned that they will somehow lose their family home or one day be kicked out. They almost certainly will not. Many are concerned about ‘giving away’ a family heirloom, and perhaps also the awkwardness of talking about all this to their children and loved ones.

I can understand all this, but we are now in a different pensions era. The post-war baby boomers are entering retirement in large numbers and the pension freedoms, as far as I can see, mean all cards are on the table when it comes to funding retirement.

To be fair, there have been equity release scams and scandals in the past. Many providers and some advisers were too greedy when it came to costs and charges.

Equity release may be the last throw of the pension dice if they are not to suffer retirement property rich and pension poor.

Some did not make clear potentially high charges and costs to clients, and others did not engage the whole family in the process, a critical factor for success.

Even so, all of this does not mean that many thousands could not benefit from equity release and perhaps other plans which could tap the value of a property.

Given the pitifully low rate of pension saving in the UK, using the family home may have to become a central part of retirement planning in future – not by choice, but because it is an essential option.

Particularly in London and the South East, and other areas where property prices have risen swiftly in the past decade, tapping property value may be sensible, in any event.

In London, the average house price is now £539,000 and many older people will be in relatively modest family homes worth £1m or more.

Even humble one-bedroom flats are selling for more than £300,000 in the less fancy parts of the capital.

For someone who has paid off the mortgage, I would argue it is common sense to at least look at an equity release plan to tap some of their home’s value.

In many cases an equity release plan could make the difference between a comfortable retirement with no worries about heating costs and the council tax, or one lived in fear of the next big bill.

A critical factor in all this is good advice, which is absolutely essential. The regulator has shown interest in this area and should pursue this as part of a later-life regulation strategy. There is more to retirement than pension freedoms, and good regulation is critical.

Advisers too can play their part. Solla, the Society of Later Life Advisers, has done some good work in this area in co-ordinating the efforts of specialist advisers, and provides some useful advice.

More is needed. Pension Wise perhaps needs to be Retirement Wise because there is more to retirement than just a pension.

Inevitably, many advisers will criticise equity release as over-priced and a clumsy solution. My fellow columnist Jeff Prestridge joined the chorus of criticism last week, and undoubtedly there have been rip-offs in this area. We had pension mis-selling for many years, but no one suggested banning pensions. The same is true for equity release – there are good and bad plans.

If we rule out equity release simply because of some bad practice and some past rip-offs, we may be missing a golden opportunity to make life better for the pension poor in retirement.

For all its pitfalls equity release remains an option worth considering. With better regulation and solid codes of practice, equity release could make the difference between penury and plenty in retirement.

Kevin O’Donnell is a financial writer and journalist

You Said

HA7Consulting on Pat O’Hara’s blog questioning the value of restricted advice (FTAdviser, 16 November)

While I will agree that there has been poor advice from IFAs on occasion, this is not the point. The point is that you can find good and bad in every situation. The trick for the consumer is to find a good IFA, dentist, solicitor and accountant.