Life doesn’t always go as planned. Perhaps you are approaching retirement and are worried that your pension will not go as far as it could or has not performed as well as expected. Maybe you have or need to retire early due to ill health and are concerned about future care costs. It’s possible that other expenses have taken priority over funding a comfortable retirement.
The State Pension alone may not be enough to live on in your later years. However if you own your own home, there may be another solution. You may be familiar with the term ‘equity release’ as it is regularly advertised on daytime TV. But TV commercials are aimed at selling and are light on facts. There are a number of factors you should consider before deciding that equity release is the right option for you.
What is Equity Release?
Equity release allows you to use the value in your home to either provide a tax free lump or an income. Depending on the product, there is a minimum age, normally between 55 and 65. Typically the older you get and the more your property is worth, the more of the equity you will be able to access. There are two types of equity release product:
A lifetime mortgage works in a similar way to a conventional mortgage. You borrow a sum of money against the value of your home and the lender will charge interest. You can either pay just the interest monthly, or allow it to roll up alongside the capital. The loan is then repaid when your home is sold (usually when you die or need residential care).
A home reversion plan is slightly different, as you actually sell your home (or a share of it) while retaining the right to live there rent-free for the remainder of your life. The proceeds can be paid to you either as a lump sum or regular income. The price is often lower than market value to account for the years the company will own the property without receiving any rent or capital.
In both cases it is usually possible to ring-fence a proportion of the property to pass on.
Equity release can be a very complex product and most providers will only allow you to arrange a plan is you have taken professional advice from both a specialist equity release adviser and a solicitor. An adviser will be able to help you decide which type of plan works best in your circumstances and make a personal recommendation.
What Are the Benefits?
Like any financial product, equity release is not suitable for everyone. It may benefit you if:
- You are over 55, own your home outright (although the Equity Release could also be used to clear off a remaining mortgage balance) and it is your main asset. Equity release can help with Inheritance Tax planning if your home forms the majority of your estate and it is over the IHT threshold. The value of your estate will reduce as you draw on, and spend the capital.
- You are not concerned about passing on the full value of your home to your family, but would like the option of leaving them something if you wish. A Whole of Life insurance plan could be considered alongside an equity release plan, as this would ensure that a cash lump sum is paid out on your death.
- You require a lump sum or income to supplement your retirement. It is important to consider the amount you need, and why. It is also worth thinking about other avenues open to you. Are you maximising the income available from your pensions? Could you rent out a room or take on a part-time job? Are there areas of your budget that could be addressed? Equity release is just one part of the financial planning puzzle, and should never be considered in isolation.
- You have no plans to downsize your home or retire abroad.
- You are not dependant on means-tested State Benefits. The capital you receive from equity release may affect your eligibility to receive certain benefits.
What Are the Disadvantages?
- You may not be able to pass on your home (or the full value of it) to your beneficiaries. You may wish to discuss it with them before proceeding.
- There are usually arrangement costs, and a lifetime mortgage generally charges a higher interest rate than a standard mortgage to allow for the additional risk taken on by the lender. Good advice is important so that you get a suitable deal to meet your financial goals.
- It is unlikely that you will receive the full capital value of your home. There is a premium for convenience, as equity release does not require you to move home or find a buyer for your property. Selling the property yourself may be more financially beneficial in the long term, although you would also need to think about any renovations, upgrades or cosmetic touches needed to make the house more attractive to buyers.
- If your plans change, there may not be enough equity in your home to downsize or move elsewhere. Early repayment charges would apply if you wanted to cancel the plan in the first few years, and of course the money would need to be paid back.
Is It For Me?
Equity release definitely isn’t suitable for everyone but it may benefit you. There could also be other solutions that are more financially sensible in the long term. Good advice is vital and an adviser would look at all of the options available to you rather than rushing into a potentially life-altering decision. The advice process should take into account:
- Your age
- Your health, including any care needs
- Whether you have anyone who relies on you financially
- The value of your home
- Your wishes in respect of passing assets on to your family
- Your other assets and income, including any State Benefits
- How much you spend
- Whether the proposed plan is affordable
If you would like to discuss your options, please do not hesitate to contact a member of the team and we will be happy to discuss the various options with you.
This is for a lifetime mortgage or home reversion plan. To understand the features and risk, ask for a personalised illustration
The content in this article was correct on 30/08/2023.
You should not rely on this article to make important financial decisions. Teachers Financial Planning offers independent financial advice on savings, pensions, investments, equity release and mortgages for teachers and non-teachers.
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