Most western economies acknowledge that demographics are building a huge pensions problem that will create a serious funding gap for social care in the coming decades. Various reports try to propose solutions to defuse this time bomb. Most believe that the silver bullet is the introduction of equity release schemes.
The first equity release plan was introduced in 1965 in the UK. The basic premise was to offer cash to property/asset rich households that were in need of physical spending funds. Various variants of the equity release concept were developed but they almost all had one thing in common: they were too expensive to run and were rarely fair to the consumers – vulnerable elderly people in need of liquidity to finance their living costs.
The latest report on ways of dealing with elderly people’s living costs was compiled by the House of Lords. The report states that equity release should be one of the key solutions for a Britain that is ‘woefully under-prepared’ for the expected explosion in the number of older people. But many financial experts and gerontologists have serious doubts about this proposed solution.
The reason is not the emotional one that many endorse. British journalist Patrick Colinson said: “We fetishise the idea that grannies and granddads must stay in their family homes all their life. Why? So they can close-off rooms as they are too expensive to heat?’
Insurance companies rely on actuarial statistics and interest rate projections to determine how much equity to release from the current value of a house. They make sure that they cover their risks by charging a not-insignificant risk premium. As an example, a well-known UK insurance company applies an interest rate of 7.1 per cent when calculating how much equity is to be released from the value of an applicant’s home.
Equity release only works over very short periods of time and for the extremely elderly. Yet some insurance companies are offering equity release plans to people as young as 55. Given that the average 55-year-old can expect to live to about 85, the interest will accumulate for 30 years.
The latest development in the search for the Holy Grail of liquidity in old age are the ‘pay-when-you-die’ deals
The latest development in the search for the Holy Grail of liquidity in old age are the ‘pay-when-you-die’ deals being offered by some UK councils. In the UK, almost 4,000 pensioners a year have to take out a lifetime loan with local authorities to meet spiralling nursing home fees while keeping their family homes. Councils seize property after they die and recover money from proceeds. Some councils offer interest free loans, while others charge up to 2.5 per cent interest.
These kind of subsidised loans are not open for all. The government scheme only applies to people with limited savings (up to £23,250) and it falls short of the UK government’s promise “that no one would have to sell their homes to pay for care”. In the UK it costs an average of £75,000 to cover residential care costs. Currently, the average person spends two years and seven months in a nursing home before they die.
Our demographics are no better than those of most western societies. The overcrowding of our general hospital, partly as a result of hundreds of social cases that occupy crucially important beds for acute medical care, shows no sign of getting any better. Our long-term geriatric planning is deficient. We need to act with a sense of urgency to create the right medical and social infrastructure that will see older people spend the last few years of their lives with as little avoidable stress as possible.
Many sociologists with a good grasp of financial realities argue that the best solution for asset/property-rich older people who face liquidity problems is to downsize. What elderly person needs a three-bedroomed house with possibly one or two flights of stairs to reach the only used bedroom when, with the limitations that old age brings, it would be much more comfortable to live in a smaller house?
This solution has its own challenges. Some relatives may do their best to dissuade their parents from adopting this solution fearing that selling a large home will deprive them of a more generous inheritance pot. Moreover, small houses built to cater for the needs of older people are scarce. The hassle of selling an old home and buying a new one is daunting for anyone, especially so for frail older people.
More thinking is needed before embarking on equity release schemes.
johncassarwhite@yahoo.com