best practices recommendations from the equity release working party
TRANSCRIPT
BEST PRACTICES Recommendations from The Equity Release Working Party
Introduction
Purpose of the Equity Release Working Party
Membership
January 2005 Report Recommendations for consumers; the government; the
Treasury and FSA; SHIP; providers; the Actuarial Profession
Recommendations for Consumers
First of all, consider other options Have a “benefits check” Consider trading down Consider sale of other assets Use savings before releasing equity
Consider your attitude towards leaving an inheritance Discuss with your family if appropriate
Recommendations for Consumers
Take financial advice from a qualified adviser Consider the impact of the ERM on means-tested
benefits Consider tax Consider both mortgage schemes and reversion
schemes Make sure you understand what your potential
repayments may be: what if you live 10 years longer than your life expectancy?
Understand the costs of entering into the scheme
Recommendations for Consumers
Take legal advice from an independent solicitor Make sure you understand the contracts you are
entering into What if you want to make repayments, trade down
or move into care What if you remarry or have a family member
move in with you What restrictions are there on the property you
can move and transfer the scheme to
A Few Danger Areas ….
Consider the customer’s needs over the course of their lifetime, but only borrow enough
Using an equity release mechanism to raise funds and then reinvesting the proceeds in an investment vehicle (other than an annuity) is unlikely to be good advice
Traditional equity release vehicles only useful for IHT planning in a very narrow range of circumstances
Lifetime Mortgage Illustrations
• KFI projection to average Life Expectancy– 50% customers understated– Debt can double in 10 years (7%)– Future criticism / complaints– Scope for change (e.g. 2 years / Life Exp. / Life Exp. +50%)
• Choice of table for calculations– Alternatives better reflect improving mortality– True joint life calculation– Aggregate effects currently understate couples:
• 25%-35% life expectancy• c.50% loan value at average life expectancy
ILLUSTRATION TABLE, CURRENT REGULATIONS
£30,000 loan, 7.5% APR, 60 year old couple
Repayment in Year Amount of Repayment
1 £32,250
2 £34,669
3 £37,269
:
:
:
:
25 £182,950
Repayment in Year Amount of Repayment
1 £32,250
2 £34,669
3 £37,269
:
:
:
:
31 £282,347
UP-TO-DATE LIFE EXPECTANCY (PMFL92mc U=2005)
£30,000 loan, 7.5% APR, 60 year old couple
10 YEARS BEYOND LIFE EXPECTANCY
£30,000 loan, 7.5% APR, 60 year old couple
Repayment in Year Amount of Repayment
1 £32,250
2 £34,669
3 £37,269
:
:
:
:
31 £282,347
36 £405,346
41 £581,927
Note: n.n.e.g. limits amount repayable to property value
SUMMARY
• Not a product of last resort, but all other options should first be considered
• The customer must understand the contract they’re entering into. Need for financial and legal advice.– Illustrate repayments well beyond average life
expectancy
• Equity release schemes can improve people’s lives overnight: but they must be sold carefully, and with full financial advice.
BEST PRACTICES Recommendations from The Equity Release Working Party