When we compare fresh fruit and vegetables at the supermarket, products may appear similar at first. But closer inspection invariably reveals otherwise. Personal preferences, rather than price, tend to influence our vegetable comparisons, though when we consider other products, a different set of criteria applies.
Just about every product can be compared by quality, price and reliability – characteristics that extend to financial products and services, almost all of which jostle for our attention in highly competitive markets. Perhaps the main difference between merchandise available in a supermarket and products marketed through financial institutions is the timeframe. Tomatoes invariably need to be consumed within a week or so, whereas we acquire most financial products, including pensions, funds and mortgages, for the long term – and for a future gain or saving.
Of course, the techniques required to compare tomatoes and pensions may differ significantly, but the basic process of comparison, whereby we estimate the similarity or dissimilarity of one thing to another, is surprisingly similar.
Consider one example. People eligible to receive a state pension on or after April 6, 2016 will know that the current maximum weekly payment is £179.60. However, deciding to defer taking the pension for a minimum period of nine weeks results in a 1% increase in the amount you receive. Defer for 52 weeks and the weekly state pension increases by 5.8%, currently worth an extra £10.42 a week.
A guaranteed annual pension uplift of 5.8% appears remarkably generous until you consider the number of years it would take to recoup the pension payments you have deferred (52 weeks x £179.60). Accordingly, the overriding consideration becomes: will you live long enough to recoup these payments?
This example highlights the need to consider longer-term financial implications, particularly once you turn 55 because, at current rates, it would take more than 17 years to recoup your deferred state pension.
It also underlines the importance of seeking a broader range of advice rather than selecting a broker or adviser based exclusively upon their advice fee which, in the short term, may appear generous, but over the longer term it becomes the exact opposite. The differences can be huge for people considering releasing equity from their homes.
Just before Christmas, a couple in their mid-fifties approached an equity release broker which levies an inexpensive-looking ‘advice fee’ of £599. The broker is irrevocably tied to one lender, which also happens to be part of the same company. It recommended an equity release plan for the couple which attracted an interest rate of 6.64%.
Sensibly deciding to shop around, our couple subsequently contacted an independent, ‘whole of market’ equity release adviser who found them a significantly less expensive plan which fitted their requirements perfectly. That adviser was Equity Release Supermarket, one of the UK’s leading independent equity release firms.
The new plan, more than 26% less expensive than the original offered by the first, tied broker, not only levied interest of 4.86%, it also came with a range of attractive, additional features, including shorter-term (and fixed) early repayment charges.
On paper, the fixed advice fee of £599 offered by the first, tied broker appears to be more attractive than the maximum of £995 charged by the second, independent firm. Once legal fees are taken into account, the couple’s possible savings were £296.
Though an interest rate difference of 1.78% between the two plans doesn’t appear significant, the difference mounts up over time. Given the couples’ respective age, their equity release plan could easily run for 28 years, perhaps longer.
Remember, the first firm was levying an interest rate of 6.64% on a comparatively small equity release loan of £41,580. In 28 years, assuming the couple had made no repayments, the outstanding loan would have grown to £265,810.
By contrast, the second broker levied interest of 4.86% on a marginally larger loan (of £41,604). Yet after 28 years, the sum repayable, also assuming no repayments had been made during this time, had grown to £157,269, saving our couple a staggering £108,541.
The moral of this real-life story is that comparisons of financial products are rarely one-dimensional. While our couple could theoretically have saved £296 in legal and other fees with the first broker, by opting for Equity Release Supermarket, a firm capable of searching the whole market for a more attractive deal, they will save more than £3,800 a year for almost three decades.
For more financial advice, check out Peter Sharkey’s regular blog, The Week In Numbers.
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