12Jun14 - The UK Equity Bank


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Many older people have equity tied up in their homes that could be used to provide them with a greater income in later life and improve their standard of living. Traditionally, the ways to unlock the equity in people’s homes have been through downsizing, equity release lifetime loans or home reversion plans. However, not everyone is in a position to downsize, there are pros and cons to each approach, and all have associated costs.

The Equity Bank would provide a new way for people to unlock the equity in their home. It would be a state agency which provides people with a low cost fixed lifetime income in exchange for a fixed share of the equity in their home. The Equity Bank would take a charge on the person’s home and recover the value of the equity from the person’s estate after their death.

The event was chaired by Baroness Sally Greengross, Chief Executive of the ILC-UK. Nick Kirwan, Director of the ILC-UK Care Funding Advice Network, opened the discussion. Professor Les Mayhew of Cass Business School and co-author of the paper 'The UK Equity Bank - Towards income security in old age' then presented the concept, after which Paul Burstow MP responded. There was then time for questions and a general discussion.

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  • Deferred payment scheme is local for example. Recoverable loan arrangements already exist under the Social Fund and for student loans.
  • Policy is owned by the Governement
  • Rates of return on investment and therefore the cost to the user would depend on Government borrowing costs, the costs of administration and consequential changes in taxes and benefits
  • People with incomes below £10,000 do not pay income tax but receive Pension Credit and help with Council Tax
    People with taxable income over £10,000 pay income tax, do not receive Pension Credit and only reduced levels of help with Council Tax up to incomes of around £14,000.

    Suppose a person decides to release equity from their home. In case (a) the financial benefit would be marginal as most of the available extra income would be offset not by tax but by the withdrawal of Pension Credit and Council Tax Benefit. State pension advice.

    Thus, a person whose income is £10,000 initially who takes out an annuity on her home of £3,000 a year would only be around £2,000 better off after tax and withdrawal of Council Tax support.
    In most circumstances therefore a financial advisor may conclude that capital draw down is the better option especially if taken in small lump sums. Such tax inconsistencies suggest that if the Government wishes to proceed with the scheme, then tax-benefit rules will require alteration in favour of the tax treatment for this kind of annuity.

    There are several options but the most obvious would be to disregard annuity income from released housing equity as long as the equity is released from their main home. This would put it on a par with draw down products which, as noted, are also not counted as income for tax purposes. Because of the high withdrawal rate of Pension Credit it also makes sense to disregard equity based annuity income for the purposes of its calculation. The impact of withdrawal of Council Tax Benefit, however, is much less consequential and there are already deductions for people living alone or are registered disabled. Thus further work is needed to verify and cost these proposals.
  • 12Jun14 - The UK Equity Bank

    1. 1. 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
    2. 2. Welcome Baroness Sally Greengross Chief Executive ILC-UK This event is kindly supported by Cass Business School #UKequitybank
    3. 3. Nick Kirwan Director, Care Funding Advice Network ILC-UK This event is kindly supported by Cass Business School #UKequitybank
    4. 4. Professor Les Mayhew Professor of Statistics Cass Business School This event is kindly supported by Cass Business School #UKequitybank
    5. 5. The UK Equity Bank Towards income security in old age Les Mayhew David Smith Cass Business School, Faculty of Actuarial Science and Insurance June 2014 lesmayhew@googlemail.com 5
    6. 6. 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
    7. 7. 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
    8. 8. 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
    9. 9. 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.
    10. 10. 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 Numberofnewplans
    11. 11. 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)
    12. 12. £250k £225k £200k £175k £150k £125k £100k £75k £50k £25k £0k Assets(£s‘000s) £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
    13. 13. £250k £225k £200k £175k £150k £125k £100k £75k £50k £25k £0k Assets(£s‘000s) £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
    14. 14. 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 14.1 2 Y 12.9 3 Y Y 11.9 4 Y Y 9.2 5 Y Y 9.0 6 Y Y Y 9.0 7 Y Y Y 5.6 8 5.5 9 Y Y 4.8 10 Y 4.5 11 Y Y Y Y 3.6 12 Y Y Y 3.3 13 Y Y 2.7 14 Y Y Y 1.9 15 Y 1.4 16 Y Y 0.7 % of all 65+ 58.0 24.0 41.1 60.1 100.0
    15. 15. 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
    16. 16. Administration of the Equity Bank Three main options 1. A service run by local authorities and integrated with social services and DPS 2. 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
    17. 17. 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
    18. 18. 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
    19. 19. Interactions with taxes and benefits Benefits -£sIncome tax +£s Housing equity State £A Estate £B=£E-£A -ve -ve +ve +ve Annuity£s Equity£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
    20. 20. 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
    21. 21. 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
    22. 22. Stakeholder impact Stakeholder groups • Older people • Heirs and family • The Government • Commercial equity release providers For further information on impacts read research report
    23. 23. Rt. Hon Paul Burstow MP Member of Parliament for Sutton & Cheam This event is kindly supported by Cass Business School #UKequitybank
    24. 24. 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