Safe Home Income Plans (SHIP), the independent trade body which represents the majority of the equity release market, has launched a discussion paper urging the Government to initiate a formal review into the sector to plug the huge gap in consumers’ pension provision.

Commenting on the launch of the discussion paper, entitled ‘Facing the Future, Redefining Equity Release to meet today’s social and economic challenges’, Baroness Patricia Hollis, a Labour member of the House of Lords, said: “It is rare for the public and private interests to coincide as they do with equity release. Equity release meets a truly urgent social need in the most decent way possible- government ministers should be singing its praises, and making it a core part of retirement funding planning.

“This report is a crucial first step in bringing equity release into the public policy arena. I recommend that equity release should develop partnerships with local government, and specialists in other areas to develop SHIP ‘kitemarked’ products. Finally, alongside a formal review of the industry, a government department should take responsibility for equity release and make sure that it is a major player at the table. Equity release must be transformed from a distress option, and taken mainstream.”

SHIP also believes that formal backing of equity release by the Government could bring the sector into the public eye and significantly increase the interest in equity release as an alternative option for pensioners looking to boost their retirement income.

One of the biggest equity release providers, Aviva, has also backed the calls for the Government to instigate a review of the sector to address a looming retirement funding crisis.  Group product manager for Aviva UK Life, Dominic Fraser-Smith, says that the sector has moved on from its inception in the early 1980s and that now is the time for Government to get more involved.

He said: “Two of the biggest hurdles to this market’s growth are public perception of these products stemming from historic issues and consumers fear that they may be financially worse off if they use equity release.  We believe that a review which looked to clearly define the government’s overall position on these products – and especially with regards to benefits – would engender much needed confidence.  This would see more providers, advisers and ultimately consumers entering the market – a vital step towards solving the looming retirement funding crisis.”

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It is regularly reported that most UK consumers have inadequate private pension provision and will therefore be relying on the State pension scheme to provide them with income during their retirement.  Since people are generally living longer and private pension saving remains stagnant, the Government is keen to improve the level of private pension saving amongst consumers to limit their burden on the State in future years. 

The Government hope to do this with the introduction of pension personal accounts in 2012.  From 2012 it is planned that all eligible workers, who are not already a member of good quality employer’s pension scheme, will be automatically enrolled into either their employer’s pension scheme or into a new pension personal account.  The automatic enrolment is the key point here – workers will not need to make a conscious decision to join, as is the case at present with other private pension arrangements.

It is anticipated that millions of UK workers will be automatically swept into these pension personal accounts from 2012.

It is expected that those workers who have a pension personal account will be able to access their account details online.  This will mean that many consumers who access their details online, but who never usually deal with other finance products online, may start to ask themselves why they don’t deal with other personal finance matters online such as their insurance or protection needs.

Over time more and more consumers will consider it the norm to conduct all their financial matters online.  Even now, a significant number of consumers are better informed about finance products because there is so much information available online.  Consumers’ general awareness of finance products can only increase once pension personal accounts are introduced, which can only be a good thing.

Safe Home Income Plans (SHIP), the body which represents the majority of the equity release schemes marketed in the UK, has suggested that that the looming problem of funding long-term care for the elderly in the UK will force equity release products into the public eye.

The cost of long-term care for the elderly can be very expensive.  For instance, for those fortunate enough to be able to afford it, the cost of care in a private nursing home can typically be between £20,000 and £30,000 each year.  For those that cannot afford to fund the cost of private care themselves, they will typically need assistance from their local authority.

This could be a financial time bomb for the UK Government as people are typically living longer and requiring long-term care as they live into their 80s and 90s.  This is against a backdrop of repeated news headlines stating that pensions in the UK are woefully inadequate for the majority of people.  As such, many people will not be able to rely on their pensions alone to provide them with sufficient income to fund the cost of long-term care – which will mean they will need assistance from their local authority.

It has been suggested that the Government is planning on introducing a £12,000 levy on any inheritance payments to help fund the cost of long-term care for the elderly while they are still alive and under the local authority care.  The Department of Health is shortly to release a green paper regarding the funding of long term care for the elderly which will provide more details of what the Government intends to do about the impending funding crisis.

SHIP says that many of the elderly that require long-term care are typically cash-poor, but asset-rich in that they have substantial amounts of equity locked up in their homes – this is despite the substantial drop in the price of property over the past 18 months. 

In SHIP’s view, the Government cannot ignore this problem.  It says that if the Government acknowledges there is a place for equity release in funding the cost of long-term care for the elderly then the public’s awareness and interest in equity release products will increase dramatically.

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Key Retirement Solutions, an equity release specialist adviser, has released figures which reveal that new equity release lending has fallen substantial by £130 million compared to this time last year.  The figures are based on comparing equity release activity during Q2 for 2008 and 2009 (April to June).

Key Retirement Solutions noted that the significant fall in equity being released from homes is down to two factors; falling house prices, which has lead to lower amounts of equity available in homes, and equity release drawdown products, whereby homeowners have chosen to withdraw smaller sums of equity from their homes.

The number of new equity release arrangements sold during Q2 in 2009 has also reduced over the past year at 5,143, down from 6,747 for Q2 in 2008.

The firm also noted  there has been a shift in the way in which homeowners are using the equity released from their homes.  For many homeowners with such a scheme, releasing equity to help their children out financially is the most popular use.  Paying for home improvements remains the most popular reason.  Unsurprisingly, funding holidays remains another popular reason why homeowners release equity from their homes.

The research also revealed that the average age of those homeowners entering an equity release arrangement has fallen from 68 to 67 – this came as no surprise since the trend over recent years reveals that the homeowners are entering equity release arrangements at younger ages.  Only a few years age the average age was 70.

Many commentators suspect that the average age will continue to fall as those homeowners who have inadequate pension provision, which is perhaps not as well funded as the generation before them, consider other means of providing funds and income during their retirement.  The reason for entering an equity release arrangement for these homeowners will not simply be a case of funding nice holidays or to help their children out financially.  Rather, it will be because they simply have insufficient income during their retirement from other sources to live comfortably.

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