There's treasure buried in your bricks and mortar

But for pensioners, equity release schemes could either be a godsend or a curse, says Melanie Bien

Equity release schemes, which enable pensioners to access some of the money tied up in their property without moving, seem like a godsend to thousands of older people desperate to supplement an inadequate retirement income.

In the first half of this year, nearly 12,000 plans were sold, says the Council of Mortgage Lenders - a sharp rise on the 5,900 taken up in the same period last year. But, after recent criticism by the Consumers' Association (CA) and the National Consumer Council (NCC), alarm bells are ringing over whether hard-up pensioners are being ripped off.

"For most people, their home is their major asset and they should think carefully before mortgaging their future," warns James King, senior policy officer for the NCC.

While pensioners need to take care before entering into an equity release agreement, there are precious few options for supplementing income other than working well into retirement, moving to a smaller property or slipping into debt.

"The great news is that we are all living longer," says Paul Stokes, head of marketing at Norwich Union, "but this comes with an additional cost. There is a danger that pensioners will be put off equity release by these comments [from the CA and NCC], but we all need to make greater provision for retirement."

If you have paid off your mortgage, equity release will enable you to get hold of some cash now. It is paid back when your property is sold after your death; any money left over goes to your estate. You can opt for a cash lump sum, or a lump sum plus a monthly income for the rest of your life.

The CA's main gripe is that equity release can be "expensive and inflexible". It argues that the way interest is charged makes it uncompetitive compared with standard mortgages. Rates on equity release schemes tend to be around 5 per cent higher than on mainstream mortgages. Interest is also rolled up - so you pay interest on the interest - and repaid once the property is sold. This will eat into your family's inheritance.

But equity release providers argue that their schemes should not be compared with regular mortgages, and that it is an advantage to pensioners not to have to pay interest during the term of the loan.

"The interest rates of most equity release schemes in the UK are fixed, yet they could apply for an indefinite period because nobody knows how long you are going to live," says Mr Stokes. "The lender is giving you thousands of pounds with no repayments during the term. And it can be used for whatever you want."

John Malone, national mortgage manager at Prudential, says the schemes are becoming more flexible. "Take somebody with, for example, a £400,000 property in London," he says. "They could borrow £100,000 to buy a flat elsewhere to rent out. The rental income can assist in their pension provision, and they also reduce their inheritance tax bill by taking equity out of their home. They are not paying anything back during their lifetime. And who's to say their property won't be worth £470,000 in 10 years' time? In which case, their children won't lose out.

"Of course, house prices could also go down, but that's the risk you take. As long as the consumer understands this, there is less chance of things going wrong."

Equity release schemes are improving as the product range develops: 21 lenders now offer schemes, and more are expected to be launched, which is likely to push down charges. The Treasury is releasing a consultation paper on equity release in the autumn, while the Financial Services Authority will regulate the market for the first time from October next year.

Until then, pensioners considering equity release should do their groundwork thoroughly. One specialist in the field, independent financial adviser (IFA) Key Retirement Solutions, says that better rates can be obtained by buying from an IFA rather than direct from the provider.

"Nobody should enter into this lightly," warns Norwich Union's Mr Stokes. "This is a lifetime commitment. You should take independent legal advice, take structured advice from an independent financial adviser and talk it over with your family before taking the plunge."

IFA Promotion has published a free guide to equity release. Call 0800 085 3250 or go to www.unbiased.co.uk