The spectre of debt doesn't just visit the young. All of the main British debt charities report an increase in the number of over-sixties asking for help. Even relatively small debts are enough to push the finances of some older people over the precipice.
Yet many of the people seeking help may be cash poor but they're property rich, so one of the leading debt charities, the Consumer Credit Counselling Service (CCCS), is recommending to some clients one of the most controversial financial products available: equity release.
"The unifying factor among pensioners coming to us is the prevalence of high levels of unsecured debt," says Malcolm Hurlston, the chairman of the CCCS. "The credit card first arrived in Britain about 40 years ago. Before that, older people weren't much concerned with borrowing at all. But the credit card habit has become natural to the Barclaycard generation. Something like 10 per cent of all the people who come to use for help with debts are over 60."
To an older person in debt difficulty, the benefits of equity release may seem obvious. It provides a large long-term loan; you can stay in your home, get the cash in hand, clear debts and repay after you die from the sale of the property. Jane, 59, from Norwich, had accrued more than £60,000 worth of credit card debt over 30 years. After taking early retirement due to ill-health and not being able to get part-time work, her debts mushroomed and she contacted the CCCS. After arranging a debt management plan and repaying some of the debt, she inquired about the possibility of equity release for the remaining £49,000. "I'd read quite a lot of bad press and was aware that there were problems and drawbacks. But it was preferable to selling my home, so I asked about it."
There are two types of equity release. The first is home reversion, where a portion of the equity in a home is sold to the provider and the value is repaid from the estate after death. The catch? The chunk is sold at 40-60 per cent of market value.
The second is lifetime mortgage where you release equity like a loan but you do not have to repay the loan or any interest until you die. The problem? Compound interest adds up, eroding the equity left in your home, and if you decided to move, early repayment charges can be from 5 to 25 per cent of the amount borrowed. The CCCS advised Jane to opt for a Hodge Equity lifetime drawdown mortgage at 6.8 per cent totalling £38,000, 19 per cent of the equity in her home. She was able to withdraw the funds as and when she needed them, limiting the amount of interest she pays.
"It was actually much more straightforward than I thought it was going to be," she says. "The main consideration was that I would continue with ownership until the end of my life and that's what I got." Jane paid roughly £600 in fees which were all taken out of the funds on completion of the release. "It has been a life saver and I wouldn't say don't do it even to those who aren't in debt. But do be cautious. There might be other options open."
For some, equity release isn't the answer. This is why CCCS decided to launch its own in-house scheme. "The main reason that the charity wanted to look at equity release is that we had a fear that clients were being offered it as an overall solution," says Tom Maloney, the head of equity release at CCCS, "but equity release is often not enough by itself." The charity will advise on equity release free of charge as part of an overall debt management solution. The in-house team acts as an independent broker, selling products from equity release companies on the open market, but on a salary basis with no commission, no bonuses and no alliances to specific providers.
"This is where we are massively different," says Mr Maloney. "When you have commission-related roles, positions can be abused. With our service, there is no benefit to the counsellor, regardless of the plan that is chosen. Any commission goes into running the service. We're not in this to make a profit." However, the CCCS will cover only advice charges and not solicitors' fees or other arrangement costs.
The introduction of a charity-based, fee-free service has been praised by consumer group Which?. "There was a real gap in the market for specialist advice to equity release," says Teresa Fritz, a spokeswoman for Which?. "It's brilliant that a not-for-profit charity can do this."
Last August, Which? mystery shopped equity release providers and independent financial advisers and found major shortcomings. "The bottom line was the quality of the advice was not at the standard it should have been," says Ms Fritz. Only a third of the advisers achieved the Which? benchmark which involved providing a thorough fact find, discussing pros and cons, transparency in fees and thorough exploration of alternatives. Which? researchers were not asked to provide enough information for a proper assessment of their needs; advisers did not explain clearly the risks and did not properly outline the cost of equity release in fees. Advisers were charging between £500 and £1,400 for the advice alone, with some billing as much as £3,000. This is still an issue today where, according to Mr Maloney, a standard advice charge at Age Concern equity release is £795.
As the only equity release service endorsed by Which? the CCCS scheme has potential and Danny Cox, chartered financial planner for Hargreaves Lansdown, feels that a service based on salaried employees and not commission is a good start. "The equity release market is crying out for innovation and better distribution," he says. "If CCCS are able to advise on equity release as part of their work – having taken on the additional regulatory costs or risks – and deliver high-quality, impartial advice in this area, more power to them."
However, there are doubts as to the effectiveness of a not-for-profit advisory service funded, at least in part, by the commission from products sold. "On the one hand, they want to give impartial advice," says Stephen Smith, a partner at Davison Smith Financial Management, "but on the other the charity is reliant on gaining income via sales to justify the cost of 'advisers'. Impartial advice requiring sales; we've seen this problem before." Andrew Swallow, a partner at Swallow Financial Planning, asks, "Is the fact that they are on a salary a guarantee that they will give you the best advice? A charitable approach would seem ideal, but in addition to removing the sway of commission, competent advisers ready to pursue all potential avenues for pensioners is essential."
Ultimately, the aim of the CCCS is to have an impact on the wider market. The new service will potentially be effective. However. while serving those in dire straits, it does not protect retirees who are exploring equity release for a different reason. By the summer, though, the CCCS says that with the help of some leading consumer figures it will have designed an equity release product – transparent in terms of fees and what is owed – to give all consumers a better idea of what they should be looking for.