Money news, advice and predictions for savers and spenders. This week: how Godiva loans will help save the baby boomers' retirement dreams.
By Jeremy Gates
Although multi-billion-pound Government bailouts around the world may ease the banking crisis, it is still impossible to imagine the financial landscape in two years' time - and therefore difficult to plan for it.
What is clear, however, is that 'babyboomers' born after World War Two have finally run out of luck.
After enjoying years of booming house prices, secure pensions and cheap energy, they are nearing retirement confronted by falling house values, wobbly pensions, huge energy and council tax bills, and interest rates on savings set to halve by late 2009.
Financial services provider Alliance Trust Savings says only one in three Britons (34%) expects a comfortable retirement. Nearly half of women (49%) don't expect to make adequate provision for retirement.
Dean Mirfin at equity release specialist Key Retirement Solutions (KRS), says: "Suddenly, many people in their 50s and 60s have fractured finances. Five to 10 years ago, they retired on safe, secure final salary pensions.
"Today, pensions are smaller because of lower annuity rates, and a rising divorce rate among older people often splits the big assets like homes and pensions."
Although house prices are falling, property is still the key to the comfort of millions once they stop work.
"For many people, equity release is one of the only ways to supplement income in retirement," says Nigel Barlow at Just Retirement, which has six equity release providers on its panel and fixes 3,200 loans a year.
"People are unsure about what is going on, but enquiries continue to come through."
Prudential thinks the over-65s hold £726 billion of equity in bricks and mortar - £310 billion of that in London and the South-East alone. Over-55s can access some of that wealth by equity-release loans which 'roll up' interest into the final debt when the loan is repaid.
Nearly 19,000 plans were taken out in the first nine months of 2008, says the latest UK Equity Release Monitor from KRS.
The total withdrawn this year will be around £1.35 billion - against £1.45 billion in 2007. Most loans fall below the maximum which providers are prepared to offer, so falling values won't kill this market.
The average amount withdrawn is rising: in London, it is £90,500 apiece, followed by South-East England (£68,756) and the South-West (£64,122). Other regions average £40,000-£48,000.
The sharpest rise in equity release was seen in Scotland - up more than 34% in the third quarter to nearly £15 million. The sharpest fall - by 33% - was in Yorkshire and Humberside, where house price falls are most marked.
While mainstream mortgage rates have risen as the credit crunch deepened, equity release loans have got cheaper: they currently start at 5.92% , fixed for life, with interest compounded.
If owners of a £250,000 home take a £50,000 equity release loan, it would be 27 years before the value of the debt exceeds the value of their home, assuming the value of the home is unchanged over that period.
In practice, a code of conduct ensures owners can't leave a negative sum when their loan is eventually paid off.
Nearly two-thirds (62%) of equity-release borrowers choose drawdown: an initial lump sum of perhaps £20,000, with an option to borrow a maximum if required, according to age and property value. In their 90s, homeowners can borrow up to 57% of property value.
But compound interest keeps the loan ticking steadily upwards: a £50,000 loan taken at 65 has grown to £90,249 at 75 and £162,896 at 85, even on the lowest rate of 5.92%.
Many advisors see equity release as strictly a last resort when other options to raise cash have failed.
A new Which? Guide called Care Options In Retirement warns that such a plan can leave people with little or no equity in their home, may reduce entitlement to means-tested benefits and might make it harder to move into sheltered accommodation if circumstances change.
The crash of 2008 will probably incline more people to release equity in the medium term because so many other investments have plunged.
Lenders are bringing more flexibility to the concept.
In February, Coventry Building Society launched a new range of Godiva lifetime mortgages - both lump sum and drawdown - with the option of paying a slightly higher interest rate in return for no early repayment charge if the loan is soon paid off.
Mirfin at KRS thinks two groups of people have seen the charms of Godiva.
"Some intend to pay off the loan when they eventually sell their home, or when they inherit a substantial sum expected from older relatives," he says.
"Others hope to downsize eventually, but they may have little hope of finding a buyer for years. They may need money for stage payments for a new home in Spain, for example, knowing they will eventually sell up and live permanently abroad."
To these may shortly be added a third group: those reluctant to turn a pension into an annuity with equity markets in chaos. Pension rules may be relaxed to enable them to wait until markets recover.
If a couple aged 62 with a £250,000 home took a £55,000 lump sum from Godiva at a fixed 6.60%, they would have to repay £67,007 if they wished to cancel the loan after three years.
Some loan providers waive early repayment charges after a specific number of years, acknowledging that this is a market which already sees a fair degree of remortgaging as borrowers keenly chase lower rates.
As banks battle to survive, will our homes bail us out? Coventry's new Godiva points us down an interesting path.
:: INFORMATION: There are 22 equity release loan providers in the trade body Safe Home Income Plans, (0870 241 6060 and www.ship-ltd.org). SHIP provides product information and list of members.
Key Retirement Solutions (0800 531 6010 and www.keyrs.co.uk); Coventry BS (0845 766 5522 and www.thecoventry.co.uk); Just Retirement (0800 015 0993 and www.justretirement.com).
Care Options in Retirement, a Which? guide, costs £10.99, incl P&P, from 0190 382 8557 and www.which.co.uk
Booklets include: the Financial Services Authority's Equity Release Schemes - Raising Money From Your Home, which can be downloaded from www.fsa.gov.uk; a Prudential guide on www.pru.co.uk; and a factsheet from IFAP Promotion, representing financial advisors, on 0800 085 3250 and www.unbiased.co.uk
POUNDNOTES
:: Shares are for long-term savers, says the old maxim, but is that any longer true? The Lex column of the Financial Times points out that if the US stock market takes half as long to recover as it did after the 1929 crash, then nobody over the age of 65 - about 12% of the American population - will ever see the market hit a new high. It won't regain peaks it has already reached in their lifetime.
Curiously, this isn't putting new - and intrepid - investors off. In London, where the FTSE-100 is beginning to swing 300 points each way on an almost daily basis, brokers say they are pouring into the market.
Angus Rigby, chief executive at brokers TD Waterhouse, says: "We are seeing a 400% increase in website traffic, double the amount of trades on an almost daily basis, and we have drafted in additional call-centre staff to manage call volumes."
The top buys at Waterhouse in the week ending October 7 were RBS, HBOS, Barclays, Lloyds TSB and British Airways, which may have caused considerable carnage this week.
TD Waterhouse enquiries: 0845 607 6001 and www.tdwaterhouse.co.uk
:: Savers with National Savings & Investments (NS&I) are starting to pay heavily for that 100% Government-backed guarantee on their money.
So much cash is gushing into its coffers that NS&I has announced its third rate cut in weeks, with some variable rate products cut by up to 0.20% per annum.
The NS&I Cash ISA now pays 4.40% tax-free, but the Easy Access Savings Account pays 3.45% gross on £5,000-£10,000, while Premium Bonds face another cut in the prize money, down from 3.40% in October to 3.25% in November. Now those £50 consolation prizes will really start to dry up.
With inflation hitting 5%, and probably more than that for many pensioners on limited incomes, this might be the moment for serious savers to spread assets around other providers to enjoy better rates from banks and building societies
:: Earwigo! Earwigo! Earwigo! In grim and gloomy days, the cheering thought is that manager Fabio Capello may have the magic (WAG-free) formula to turn England's pedestrian football team into worldbeaters.
Abbey says the cost of following 'The Three Lions' all the way to the World Cup final in South Africa in 2010 could be £169.76 per month - total £3,372.66 - if the money is invested in Abbey's eSaver Direct account paying 6.50% gross from now until April 2010 by fans who fly economy, stay in budget accommodation and watch matches in cheap seats.
However, fans who fly premium economy, stay in mid-range accommodation and use medium-priced stadium tickets will need to save £5,193.71 - or £261.42 per month.
And those demanding real luxury - business class flights, luxury hotels, best tickets in the stadium - will need £11,174.79, requiring a monthly saving of £562.46.
:: The first things to go as Britons struggle to balance their books are insurance policies and pension contributions - scrapped already by 42% of adults, according to price comparison service uSwitch.com.
Its survey reckons that of those who scrapped policies, some 15% axed car breakdown cover, while 13% dropped private health or dental insurance, and 13% cancelled a life insurance policy.
Only 6% of households, however, cut home contents cover, and only 7% scrapped mortgage payment protection insurance, to pay the mortgage if they get the sack.
In 86% of cases, however, cancellation of insurance and pension contributions saved up to £50 per month, Fingers crossed that nothing goes wrong while these households take a bit of a gamble.
Enquiries: uSwitch is on 0800 093 0607 and www.uSwitch.com
:: HIGH FIVE SAVERS:
Phone No Rate Account Period Deposit Interest paid
Anglo Irish Bank 0845 455 2222 7.05% (F) Fixed Rate Bond One Year Bond £500 On maturity
Coventry BS 0845 766 5522 6.60% Sixty Plus Post-Save None (R) £500 Yly
Secure Trust Bank 0121 693 9111 6.57% 60 Day Notice 60 Days £1,000 Quarterly
Whiteaway Laidlaw Bank Ltd 0161 833 5444 6.56% 60 Day Bonus 60 Days £1,000 Yly
West Bromwich BS 0845 338 7295 6.56% Crown 30 Day Notice 30 Days £1,000 Yly
:: TOP FIVE BORROWERS:
Phone No Rate Period Max% Adv Fee Incentive
First Direct 0845 610 0100 4.99% for term 80% £999 Yes
HSBC 0800 494999 5.44% for term 90% £499 Yes
First Direct 0845 610 0100 5.49% for term 90% £399 Yes
Britannia BS 0800 013 2322 5.64% for three years 80% £999 Yes
Marsden BS 0800 801645 5.69% to 30/09/13 75% £949 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476476 (All rates subject to change without notice)
