Personal Finance: Time to play equity card

Cashing in on the value of your home can lead to a happy old age. But take care. By James Moore

Property-rich, but income-poor. This is the fate of an increasing number of elderly people who reach retirement age as owners of substantial homes. However, at the same time, inadequate financial planning, or some other mishap, means that they have very little money to live on.

Using the equity in your home to raise cash is one traditional method of boosting income. However, the National Consumer Council (NCC) last week warned that serious gaps in financial regulation could lead to disaster for vulnerable pensioners who try this tactic.

Equity-release plans, as they are known, involve taking a mortgage out on a home to provide an income or cash, usually to make life more comfortable for retired people.

In the late Eighties, plans linked to risky investments backfired disastrously, leading to situations in which many people faced the prospect of losing their homes.

Such plans are now banned. In the past year or so, some financial companies have become increasingly interested in marketing equity release, with household names such as Norwich Union and Northern Rock entering the fray. Yet plans currently on the market are complicated and require expert financial and legal advice.

In any event, the NCC, which was set up and largely funded by the Government, says the rules governing today's "safe" equity-release plans remain flawed.

The NCC says equity release could provide real benefits for elderly people. But it identifies a range of bodies and laws covering the plans and says this gives consumers "the worst of all worlds - partial regulation which restricts availability and hinders innovation without providing proper protection in return".

Indeed, the type of plan that the NCC report identifies as "offering perhaps the most certainty of all the schemes the decision of available" has been killed off by Chancellor Gordon Brown's to axe mortgage interest relief (Miras).

These plans involved elderly people taking mortgages out to buy a small life annuity which paid the interest and provided a small income. An alternative scheme involves signing away part or all of a home to an insurance company, in return for an annuity or a lump sum.

The company operating the plan expects to make its money when the home is sold outright, either on death or upon entry into residential care. Providers include Stalwart Assurance, Carlisle Life, Home & Capital and BPT Home Reversions.

Another type of plan involves taking out a fixed-rate mortgage on a percentage of the value of a home. The interest rolls up and both the capital and the interest are, once more, paid off when the house is finally sold outright.

Both Norwich Union, with its Capital Access Plan, and Northern Rock, with its Home Equity Release Mortgage, offer variations on this theme, but while Northern Rock charges interest on the loan at 7.29 per cent, NU charges interest on the entire value of the home at 2.95 per cent, making comparisons difficult.

Finally, shared appreciation mortgages, available from the Bank of Scotland and Barclays, offer an interest-free loan of up to 25 per cent of a house's value.

In return, up to three-quarters of any increase in the home's value is taken by the loan provider when the loan is repaid.

Unfortunately these schemes, currently unavailable, are generally offered for a limited period and so far, unlike the other schemes, none have yet contained provisions to enable people to move house.

There are a number of variations on these themes, including schemes specifically set up to fund home improvements or even care costs, and those run by local authorities and by charities.

Unlike some of the Eighties plans, most of the modern equity-release schemes carry guarantees which should mean that, whatever happens, people who take them out should not lose their homes and can continue to live in them for the rest of their lives.

Regulatory problems crop up because, depending on how plans are set up, they can be governed by statutory bodies, such as the Financial Services Authority, or voluntary ones, such as the Council of Mortgage Lenders' code of practice. In some cases, the plans are monitored by the Safe Home Income Plans group (Ship), an industry trade association, leading to the problems that are identified by the NCC report.

The NCC also warns that, by exploiting gaps in this system, companies could still market products that might leave elderly people in severe difficulties. They could be stuck if they want to move or face losing their homes if things go wrong.

Even "safe" products could have a nasty sting in the tail if they are taken out by someone for whom they are not suitable. Tax rates and Government benefits can be affected by any increase in income, or even the provision of a lump sum.

Benefits such as pensioners' income support and council tax benefit can be hit by any extra income or even lump sums. Moving from non-tax-paying to tax-paying status, or going up a tax band, can also eat into any gains made by buying into an equity-release scheme.

Age Concern spokeswoman Rhian Beynon says: "We have never endorsed any such plan. They may be suitable for some people but not for others.

"We offer a fact sheet explaining about them. People need to be very careful that any income generated does not affect any existing benefit they are entitled to."

Sue Mercer, the office and technical manager at Hinton & Wild, an independent financial advice firm specialising in equity-release schemes, says: "The best plan depends on a person's circumstances but it is important to make sure you are significantly better off before going ahead."

It seems unlikely that the type of disaster which befell people in the late Eighties will be able to occur again, especially after the Government outlawed the risky schemes which caused it.

But the NCC report concludes: "Equity-release schemes could benefit the very poorest and elderly people (as well as others) but only if they are properly regulated and managed, and detailed information and advice about them is available to consumers.

"Therefore we think the Government should encourage wider availability of equity-release schemes, but not without first taking steps to regulate for safer selling and much better information and advice for prospective purchasers."

Age Concern's free fact sheet titled "Raising Capital on Your Home" is available by calling 0800 009966; for a Help the Aged fact sheet on equity-release contact Esther Ellmann on 0171-253 0253 ex 257; for a list of Ship members and a free leaflet write to The Secretary, Safe Home Income Plans, Tolworth Tower, Ewell Road, Surbiton, KT6 7EL; Hinton & Wild: 0181-390 8166