Phil Nash(pictured), Chief Sales Officer at Shepherds Friendly, says new legislation has the potential to cause complacency about income protection among young people. But it might also give IFAs the chance to broaden their intergenerational relationships
You may be aware that there is a Renters’ Rights Bill currently making its way through the House of Lords – this has been widely welcomed by renters and will undoubtedly give them more security in their homes.
But as with everything, there’s also a risk we’ll see some unintended consequences and there is a potential link here to further complacency about income protection.
Readers of this publication, and particularly those active in the protection space, already know about the UK population being chronically underinsured on this front. A survey carried out by Shepherds Friendly last year found that only 14% of British adults have income protection, with even lower percentages among those in the youngest age groups, who are more likely to rent.
It’s also been well documented that homeowners are more likely to take out income protection than renters, despite their outgoings being very similar. Research from Royal London last year revealed that while 20% of homeowners had income protection, the percentage fell to 6% among renters.
So if renters are apathetic now about the need to protect their income – and hence their ability to pay the rent – the new legislation, which it’s worth noting applies only to England, may well exacerbate this. It increases the amount of arrears renters have to be in for landlords to evict them to three months from two; it also doubles the amount of notice they are given to leave in such cases to four weeks from two.
With tenants now effectively having at least a four-month leeway period if they don’t pay the rent, it’s easy to see how income protection could fall even further down the priority list.
What’s the relevance to IFAs?
Given various reports put the average age of an IFA’s clients at between 45-65 and most advisers report their client base is ageing, you might wonder why this matters to advisers. Most of their clients are likely to be homeowners and thus unaffected by such legislation – or are they?
If their average age puts them in the Gen X or Boomer category, it stands to reason their offspring will fall into the Gen Z or Millennial cohort, putting many in the Generation Rent bracket.
I can relate to this scenario, as not only do I fall into the age bracket above, but I also have a son who has recently taken up rented accommodation for the first time.
Advisers would do well to consider initiating conversations not just around their clients’ own income protection, but also that of their children.
This may not be the hard sell some imagine it to be. One of the barriers IFAs face when discussing income protection is cost. With most clients being older and at the higher end of the salary spectrum, naturally their premiums are also at the pricier end. But with their children being younger and probably earning less, the product may be an easier sell, especially when compared with the alternative.
This is because one of the likely consequences of the new legislation is that more defaulting tenants will be pursued for unpaid rent by their landlords.
Under the current system, landlords can evict non-paying tenants under either Section 8 or Section 21 of the Housing Act. The former can only be used for ‘fault-based’ evictions – for example, the tenant is in arrears or displaying anti-social behaviour – and involves a court process that in some parts of the UK can take more than a year due to court backlogs. The latter allows landlords to ask tenants to leave for any reason at all, with just two months’ notice and usually no need for a court hearing.
It’s only via Section 8 that landlords can reclaim rent arrears as part of the process, but given the much shorter time frame of Section 21, at present many landlords use this even when a tenant is behind in their rent, simply to get them out quickly.
One of the most significant elements of the new legislation is that landlords will no longer be able to use Section 21, leaving them only the Section 8 route. If they are forced to use this longer process, why wouldn’t they also pursue the repayment of arrears while they are at it?
If someone isn’t able to pay their rent at all during the eviction process, by the time they are actually removed they could easily owe a year’s rent, plus costs. Given Rightmove now puts the average London rent at £2,695 per month, there could be a £30,000-plus amount outstanding that if unpaid, results in a significant CCJ.
Many parents, especially those with the means to have a financial adviser, aren’t going to want that to happen to their child and will end up paying the debt themselves. That’s assuming, of course, they’ve not been pursued for it already. Landlords are expected to become a lot more risk-averse and in future many may take younger tenants only with guarantors, which could mean parents having to cough up at the first sign of unpaid rent.
Set against this risk, the average cost of an income protection policy for someone aged 25 of £9.92, according to Royal London, may well seem like a bargain to clients and their children. For advisers, the reform of rental laws could make it tougher to engage with renters directly, but equally it might also provide an opportunity to broaden their intergenerational client relationships.
