A more competitive market means you could save by switching provider.
For cash-poor retirees who own their own home, equity-release plans have long offered a means to gain capital later in life. And with more people now taking out such plans, the market is increasingly competitive.
As a result, if you took out an equity-release plan a few years ago, you may now be able to switch to a much better deal.
Equity-release plans enable older homeowners to unlock some of the value tied up in their properties while staying in the home. The money advanced is repaid, with interest, from the proceeds of the sale of the house when they die or move into long-term care. Traditionally, providers have charged expensive rates compared with standard mortgage deals.
Moreover, with interest accumulating over the lifetime of the loan, the final repayment cost can be very high. Most providers offer a no-negative-equity guarantee, so the sale of the property will always cover what is owed, but there may be little left over.
The lower the interest rate you pay, the less chance there is of that happening. The good news is that rates have come down as the market has grown: the number of products available went from 58 in 2016 to 139 in 2018, according to the Equity Release Council, a trade body. And while the average loan now costs 5.22% a year, down from 5.96%, the most competitive products cost less than 3.5%.
When it pays to switch
For those who took out equity-release plans at a time when rates were less competitive, the potential savings from switching are therefore compelling.
If you currently owe £100,000 and you are paying a pretty typical interest rate of 6% a year, the debt will have grown to around £182,000 in ten years’ time; if you can move to a rate of, say, 3.5%, your debt in ten years’ time would be only £142,000. Unfortunately, for most people, the calculation will not be quite so straightforward. Note that the Financial Conduct Authority, the City regulator, requires equity-release customers to take independent financial advice before signing up for any new product. This is likely to cost you between 1.5% and 2% of the transaction value. Finally, there is a very good chance your existing equity-release plan has early repayment charges, which you’ll need to take into account.
Still, even assuming additional costs of £5,000 in the above example, covering the price of advice and exit fees, it would be less than three years before your switch paid off. It’s worth thinking about.
Ban on cold-calling finally arrives
New rules making it illegal to cold-call people to offer pensions advice finally came into effect last week, almost two years after the ban was first announced by the government. Under the new rule, firms can be fined up to £500,000 for making unsolicited approaches offering pension investment schemes.
The ban follows a sharp increase in the value of pensions-related fraud since the pensions freedom reforms of 2015 made it easier for people to access their savings, with victims losing an average of £91,000 each, according to the Financial Conduct Authority, the industry watchdog.
Such scams often begin with a cold-call from a salesperson offering a free pensions review, followed up by the promise of tempting returns from alternative investment schemes; in practice, such returns never materialise, and in many cases fraud victims have simply had their cash stolen.
The ban on cold-calling is helpful as it will reassure people that no legitimate adviser or pension provider would get in touch with you via an unsolicited phone call. However, it’s important to remain on your guard, as determined fraudsters will probably be undeterred. The rule of thumb remains the same: treat any unsolicited approach from someone offering advice as an attempted fraud, and automatically ignore it.
More protection for public-sector pensions
Public-sector workers whose jobs are outsourced to private-sector providers will in future be entitled to retain their membership of the Local Government Pension Scheme (LGPS), under new proposals from the government. At present, firms bidding for such contracts are entitled to offer staff transferring to them an equivalent pension arrangement, rather than paying for their continued LGPS membership, but this option is to be scrapped.
The reform reflects increasing concern public-sector workers could end up having to depend on the Pension Protection Fund (the industry lifeboat fund) if they move to a private-sector firm that subsequently goes bust, potentially limiting the retirement benefits to which they are entitled. This danger has been brought into sharp relief by the collapse last year of the contractor Carillion, where tens of thousands of former public-sector workers saw their pension rights moved to the lifeboat scheme.
However, the government’s proposal is not without controversy. Critics fear the move will see the LGPS saddled with additional pension liabilities over which it has relatively little control, given funding for these members would come from private-sector firms.
There is also concern the LGPS might have to pick up the cost if a private-sector contractor went bust without having properly funded its commitments.
The move would also put public-sector workers in a different position from their private-sector counterparts. Currently, someone working for a private-sector firm whose job is transferred to another business must be offered broadly equivalent pension rights to those they enjoy today – but the new employer has no obligation to maintain their membership of their former employer’s scheme.