12Jun14 - The UK Equity Bank

The UK Equity Bank:A new way to unlock home equity

and provide income security in retirement

Thursday 12th June 2014

This event is kindly supported by Cass Business School

#UKequitybank

Welcome

Baroness Sally GreengrossChief Executive

ILC-UK

This event is kindly supported by Cass Business School

#UKequitybank

Nick KirwanDirector, Care Funding Advice Network

ILC-UK

This event is kindly supported by Cass Business School

#UKequitybank

Professor Les MayhewProfessor of StatisticsCass Business School

This event is kindly supported by Cass Business School

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The UK Equity Bank Towards income security in old age

Les Mayhew David Smith

Cass Business School, Faculty of Actuarial Science and Insurance

June [email protected]

5

What is the ‘Equity Bank’

• The Equity Bank is a facility for creating extra income for life linked to inflation for life

• A person trades in a proportion of equity which the state redeems on death

• It’s purpose is to provide for greater income security in old age from a trustworthy source

• There would be no constraints on how money is spent but would meet needs not currently catered for by the welfare system

The problem addressed•Many people reach retirement without having planned how much income they will need face increasing problems as they grow older

•For example, a partner dies and health starts gradually to fail and life becomes more difficult and harder to cope alone

•Income is significantly reduced, homes fall into poor decorative order; bills, and domestic chores mount up because they can’t afford to pay for help

•They do not qualify for home help or other financial support because they don’t’ pass the asset test

•If they get extra benefits it is with strings attached and amounts are insufficient to cover their financial needs; Isolation and neglect creep in

•The Equity Bank helps by enabling then to generate extra income from their home from a trustworthy source

7

What is the economic rationale?

• The ONS estimates the population aged 75+ will double from 5m to 10m by 2040

• Although pensions are being reformed these reforms do not apply to existing pensioners

• Many older property owners have seen large, tax-free capital gains due to the rising value of property

• Not to use the value in the home increases the cost of welfare to the rest of society

• Higher levels of equity release would generate modest macroeconomic benefits and create new jobs with local benefits

House prices and inflation

House prices have increased faster than the RPI. Since 1980, the House Price Index has grown 2.6 times higher than inflation since 1980. The amount gained depends house purchase timing and sale. Most people approaching, or already in retirement, bought their homes in the 1970s and 1980s. Hence their financial gains have been greatest.

Equity release trends in practice

Sales of plans reach a peak in 2007 at 28,000 before falling back to 16,000 in 2011. Current sales are running at 19,000 p.a. We estimate a probable market of ~40,000 a year for the Equity Bank in addition to the existing market

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Year

Nu

mb

er o

f n

ew p

lan

s

Why the state should be involved“Anxieties include

poor value for money and provider reputation,

complexity and lack of advice, and could

affect benefits”

“It is absurd really that even if you have got the money to pay for your own care, it is

actually quite hard to do it.”

“People with housing equity

should be enabled to release it simply, without excessive charges or risk.”

“Older people lack confidence in the products and take-up is

poor.”

“Ignorance about mean-testing with its different tapers, cliff edges and capital

rules lead to inertia.”

“The equity release market suffers from quite considerable market failures.”“SOLVENCY II

could cause the UK market to contract

and restrict its develop in other

countries.”

Sources: Ready for ageing? Houses of Parliament (2013)Unlocking the potential, DEMOS (2014) Assessment of Equity Release Pilot Schemes, Joseph Rowntree (2013)Accessing housing wealth in retirement, Towers Watson (2013)

£250k

£225k

£200k

£175k

£150k

£125k

£100k

£75k

£50k

£25k

£0k

Ass

ets

(£s

‘000

s)

£0 £5,000 £10,000 £15,000 £20,000 £25,000 £30,000

Income (£s)

A~2.4m

B ~2.3m

C~2.1m

D~4.3m

Who is it aimed at?Asset-Income map for the 65+ population

A asset rich income poor

B asset rich income moderate/good

C asset poor income moderate/good

D asset poor income poor

£250k

£225k

£200k

£175k

£150k

£125k

£100k

£75k

£50k

£25k

£0k

Ass

ets

(£s

‘000

s)

£0 £5,000 £10,000 £15,000 £20,000 £25,000 £30,000

Income (£s)

A~2.4m

Who is it aimed at?Asset-Income map for the 65+ population

A asset rich income poor

B asset rich income moderate/good

C asset poor income moderate/good

D asset poor income poor

Segmenting the 65+ population for targeting purposes

Risk factors help to identify and segment the target population:

•Assets more than £100k

•Living alone

•Age 75+

•Income les than £15,000 p.a.

There are an estimated 400,000 in our principal risk group

risk category

assets >£100k live alone age 75+

income <£15000

% of total 65+

1 Y 14.12 Y 12.93 Y Y 11.94 Y Y 9.25 Y Y 9.06 Y Y Y 9.07 Y Y Y 5.68 5.59 Y Y 4.810 Y 4.511 Y Y Y Y 3.612 Y Y Y 3.313 Y Y 2.714 Y Y Y 1.915 Y 1.416 Y Y 0.7

% of all 65+ 58.0 24.0 41.1 60.1 100.0

The Equity Bank in practice• Eligible persons would have their homes valued and be

advised by a qualified financial advisor on best options • They would receive an income for life that would rise with

inflation• The cost is met on the policyholder’s death and is recovered

from a person’s estate based on percentage of equity ceded• Any growth in the value of the home on the balance of equity

would remain theirs• There would be arrangements for those that died in the early

years after taking out a loan to give extra protection

Administration of the Equity Bank

Three main options1. A service run by local authorities and integrated with

social services and DPS2. A national scheme, like student loans service which

benefits from economies of scale administered from with DWP

3. A mixed model in which the bank is and agency of the state and the service is out-sourced to existing equity release providers

Equity released for different levels of annuity and interest rates

Note: Capital requirement figures in £’000s

age 1% 2% 3% 4% 5% 60 56.9 63.2 70.0 77.4 85.3 65 46.4 50.4 54.6 59.1 63.7 70 36.7 39.1 41.6 44.1 46.7 75 28.2 29.5 30.8 32.1 33.4 (a) £2,000

age 1% 2% 3% 4% 5% 60 85.4 94.9 105.1 116.1 127.9 65 69.6 75.6 82.0 88.6 95.6 70 55.1 58.7 62.4 66.1 70.0 75 42.3 44.2 46.1 48.1 50.0 (b) £3,000

Table shows value of equity to be released in £’000s for given levels of annuity and interest rates with annuity rising with inflation:

(a) £2,000 p.a.

(b) £3,000 p.a.

Equity released

Cash flows and break even point

Chart showing cash flows for 1,000 women aged 75 in 2015 based on £2,000 annuity at 2% p.a.

Age loan ('000s £s) break-even

year 60 63.2 2033 65 50.4 2030 70 39.1 2027 75 29.5 2024

Break even year

Interactions with taxes and benefits

Benefits -£sIncome tax +£s

Housing equity

State

£A

Estate£B=£E-£A

-ve

-ve+ve

+ve

Annu

ity

£s

Equi

ty

£s

Chart showing money flows in the system (Key: £E is value of home, £A is the equity released; £B is the residual value of the estate). Actual flows will depend on tax benefits rules.

A person releasing equity may lose out financially if their benefits are reduced and they must pay income tax

Tax and benefit issues arising• Details are complex but a in general a single lump sum counts

as capital and regular payments as income• Most benefits for older people are not taxable benefits and so

are not a problem• Capital draw down from main home is free of tax but may

breach capital allowances for means tested benefits• However, an income needs to be on equal footing with capital

draw down tax purposes• The new flat rate pension will remove possible interactions

with pension credit • Access Council Tax Benefit is likely to be most affected but it is

fixable

Summary• Evidence that Equity Release would meet financial needs not being

met elsewhere - neither pensions, the benefits system, commercial equity release, nor social services

• Is designed not to replace the commercial equity release market but to complement and improve it among a specific demographic group

• Simple and relatively uncomplicated compared with commercial equity release schemes which are not taken up by the target group

• Advantages are low cost and trustworthy and with the policy and administration under ‘one roof’ so easier to dovetail with tax and benefit issues

• Does not have to be expensive and demand will vary by individual circumstances and area of the country . It is also self-financing after a relatively short period

Stakeholder impact

Stakeholder groups• Older people• Heirs and family• The Government• Commercial equity release providers

For further information on impacts read research report

Rt. Hon Paul Burstow MPMember of Parliament for Sutton & Cheam

This event is kindly supported by Cass Business School

#UKequitybank

The UK Equity Bank:A new way to unlock home equity

and provide income security in retirement

Thursday 12th June 2014

This event is kindly supported by Cass Business School

#UKequitybank