As a survey reveals that one in three people would use equity release to pay for their long-term care, Harvey Jones looks at some of the implications
Sales of equity release continue to grow but the public has never taken the product to its hearts.
It remains a product of last resort, which homeowners turn to only after other methods of raising money have been used up.
But a last resort can still be a financial lifesaver, especially for older people facing up to the unhappy fact that they need to fund shockingly expensive long-term care costs.
Their savings may be gone, but equity release is still there for them.
A recent poll by Old Mutual Wealth shows that one in three people would use equity release to pay for their long-term care. So how big an opportunity is this for advisers?
Nigel Waterson, chairman of industry body the Equity Release Council (ERC), says the need for financial support to cover care costs is more acute than ever.
“The proposed cap on care home fees has been postponed to 2020, State-funded care has been drastically reduced and many are struggling to cover the costs from their savings,” he says.
Local authorities will only offer help towards care costs for those with total assets, including their home, below £23,250 in England and Northern Ireland (£23,750 in Wales and £25,250 in Scotland). They will only pick up the full tab at £14,250.
Once people have run down their savings, many have few options other than to raid the value in their home.
With retired people sitting on £335bn of housing wealth, according to figures from Retirement Advantage, this is a massive resource. Downsizing is one way to free it up, but this is expensive, time-consuming and bothersome. Equity release is another.
Waterson says the equity release can be used to fund care in several ways.
“It offers a means to pay for home adaptations to provide more comfort in later life and, in some cases, delay or remove the need for full-time care,” he explains.
It can also be used to fund domiciliary care at home, which may be cheaper and better than moving into a home, he adds.
What equity release cannot do is to pay for nursing or residential care home fees, as going into a home is one of the two triggers at which point the loan must be redeemed. Death is the other.
A change of rules
It briefly seemed that homeowners who did not want to sell up might have a valid alternative to equity release in the shape of the universal deferred payment scheme, which launched on 1 April.
This effectively lends money to nursing and care home residents and recovers it after death from the proceeds of their house sale. But Waterson says funding limits and fuzzy rules have undermined the scheme.
“There are too many unanswered questions about how councils will assess the loans, value the properties and what happens if the loan exceeds the equity available when the house is sold,” Waterson says.
By contrast, equity release providers who follow the ERC’s code of conduct offer a no-negative equity guarantee, so that homeowners and their families will never owe more than the value of their home.
Dean Mirfin, group director at specialist equity release advisers Key Retirement, says the equity release payout can either be used as a sole funding source or to top up local authority (LA) funding.
Some types of care do not qualify for LA funding, for example hiring a cleaner, gardener or somebody to do the ironing or shopping.
“Equity release can help to fund additional hours of care where the LA funding stops,” Mirfin says.
The major advantage of self-funding is that the customer is in control of the care they receive and who provides it, he says.
But advisers must not rush into equity release. First they must assess what other forms of support are available to their client, such as means-tested benefits, because releasing equity could affect eligibility for State support.
This can be a complex task, as means testing and LA entitlement rules change regularly, Mirfin warns.
“Advisers should now only really consider drawdown plans, where equity can be released in tranches to take into account future changes in legislation,” he says.
Most clients should also run down their savings and investments before turning to equity release, Mirfin continues.
“Ultimately, borrowing money to fund care, or for any other need, isn’t it a good idea if you have other means of paying,” he explains.
Andrea Rozario, chief corporate officer at Bower Retirement Services, says advisers should also check whether clients are eligible for grants and LA support before releasing money to pay for household adaptations.
After establishing that equity release is the best option, there are several ways to use the payout. Rozario says one option is to buy an immediate needs care fee payment plan.
“This gives guaranteed cover for the ongoing cost of residential care and is valuable for those who want to hold onto the family home because a spouse is still living in it.,” she says. “The drawback is that there may not be enough equity to buy a second immediate needs care plan if the surviving spouse needs this later.”
Rozario says advisers have to explain the impact on their client’s estate and any future inheritance.
They must also consider whether to make monthly payments on the lifetime mortgage or allow the debt to roll up. And they must understand the impact of early redemption penalties if they cash in their plan.
Rozario says that given the complexity, equity release advice should only be delivered by specialist advisers who belong to a body such as the Society for Later Life Advisers.
Craig Colton, equity release director at Aviva, says every single case is different and presents a new challenge for the adviser.
“Whether the customer goes for equity release depends on how much funds they have available, their inheritance, entitlement to welfare benefits and of course personal wishes,” Colton says.
Clients often prioritise emotional factors over practical ones.
“If the customer goes into long-term care, there is an argument that they no longer need the house, yet many people are reluctant to sell,” Colton says. “Sometimes even very ill people think they will come out of care, or families see it is an acceptance of the inevitable.”
According to Colton, families also need to consider setting up a Lasting Power of Attorney as early as possible to allow them to make decisions on behalf of their elderly relative in case they lose mental capacity.
The average bill for a room in a care home is now a shocking £29,389 a year, according to new research from Prestige Nursing+Care. It can hit as much as £40,000 a year if nursing care is needed as well.
Stephen Lowe, director of external affairs at Just Retirement, says: “Care costs can be ruinous, but in most cases they are far more modest. The Dilnot Commission pointed out that a quarter of over 65s will pay no care costs and a half would face lifetime care costs of less than £20,000. Only one in 10 will spend into six figures.”
Where LA support is unavailable or inadequate, releasing equity can maintain quality of life for longer, Lowe says.
“However, it is a commercial arrangement where people must understand the terms and conditions and the loan plus interest must ultimately be repaid,” Lowe explains.
Simon Wrench, later life adviser at the Wealth Care Partnership, regularly recommends equity release to purchase a domiciliary care packages or an immediate needs care plan.
He warns that care at the customer’s own home can be just as expensive to fund as residential fees.
“You don’t just have to fund the care, you also have to keep the household going as well,” Wrench says.
According to Wrench, equity release is just one solution among many, but sometimes it is the only way.
“Most people’s payment options are limited because they seek advice later rather than sooner, and have usually run down their savings by then,” he says. “Every decision is made on a bespoke, individual basis, depending on what resources the client has.”
Andrew Dixson-Smith, business development director and adviser at the Eldercare Group, says too few people take advice on funding care at home.
“I work with around six self-funding domiciliary care agencies who actively promote our advice services yet I receive very few enquiries,” he says. “Most people don’t know any other way to fund their care other than to run down their savings.”
He says his clients have typically lived in their home for 40 to 60 years and benefited from the increase in value, such as one 92-year-old client who was keen to leave as much to his son and daughter on death as he could.
“The problem is he faced the cost of live-in care at £48,000 a year plus household running costs of another £15,000, leaving a £35,000 a year shortfall,” he says. “My solution was to take out a lifetime mortgage to buy an immediate needs annuity to pay him tax-free income for the rest of his life.”
His son, acting as power of attorney, reassured his father that the continuing rise in property value could potentially pay for the annuity in three years.
Dixson-Smith says: “The immediate needs annuity is the only piece-of-mind product that is specifically designed to fund the gap between income and care fees, and because it is individually underwritten, the client can benefit from enhanced terms. Payments can also be made free of tax if they go to a care provider that is registered with the Care Quality Commission.”
Dixson-Smith says advisers and clients are helped by the growing flexibility of equity release plans.
“An elderly client receiving care at home may need to sell their property at some point and move into a care home and I would therefore select a provider with no cancellation penalties,” he says.
Indexation, capital protection and deferred commencement of up to five years are all now options.
“Partnership, Aviva and Just Retirement offer money back guarantees in the first six months to protect against early death,” he says.
Alice Watson, product and communications manager of Retirement Advantage Equity Release, says product innovation is helping to drive the rapid growth of equity release.
“We have seen long-term care driving increased interest from consumers,” Watson says. “Equity release is part of their thinking, and we need to respond as an industry to make sure the right products are available.”
Equity release may never win a place in people’s hearts but when the alternatives have run out, it can help care for them nonetheless.