Equity release schemes are likely to be the subject of a major education drive, after a Financial Services Authority (FSA) report revealed that many pensioners are unable to grasp how they work.
In its ageing population report, Financing The Future, the FSA said consumers in their 50s, 60s and 70s had insufficient understanding of these retirement products to know whether they were getting the best deal.
In the report, the FSA said: ‘Our concern is that consumers may not fully understand some of the complexities and risks with these products (including lifetime mortgages and home reversions). While the market is still small compared with other decumulation products, such as annuities, equity release products could develop into a significant market, given the growth in housing equity and the increasing burden of self-provision in retirement.’
In particular, the FSA points out that consumers do not understand that there is a possibility of negative equity with a lifetime mortgage, and that interest rolled up over several years can make it difficult to move at a later date and limit the amount they can leave to beneficiaries. Consumers are also not always aware that full home reversion means the property belongs to the product provider, rather than beneficiaries, and that there are tax and benefit implications.
Jon King, director of Safe Home Income Plans (SHIP), welcomed the move. He said: ‘Over the past 10 years, SHIP has done a lot to promote safety standards of products, but the consumer level of knowledge is not where it should be. There has been a lot of product innovation over the past five years, and that has added to complexity. Equity release is now a mainstream product, whereas five years ago it was a marginal one ‘ so anything educating the public about mainstream products is good news.’
He added that any policy bought from a SHIP member cannot go into negative equity.
To remedy the situation, the FSA is producing specialist literature encouraging consumers to ask whether there is some other way of accessing funds or increasing retirement income, or whether ‘trading down’ might be better than taking out a full home reversion.
l Julie Henderson is editor of IFAonline