Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
How does equity release help with retirement planning?
If you’re short of cash in retirement and have a lot of wealth tied up in your property, it’s worth considering whether equity release could help.
You’re eligible for equity release if you’re aged 55 or over and own a property in the UK which is worth more than £70,000.
Equity release isn’t for everyone. The industry’s trade association, the Equity Release Council, demands that all prospective customers take professional regulated financial advice and receive independent legal advice.
It’s incredibly important to understand what you’re doing and the impact it could have on your family.
WHAT IS EQUITY RELEASE?
Equity release enables you to release some of the cash stored up in your property without needing to move home.
There are two main types of equity release product: a lifetime mortgage, which is a mortgage secured against your property; and a home reversion plan, where you sell all or part of your property to a reversion company.
According to Just, the retirement products provider, lifetime mortgages account for over 99.5% of all equity release solutions.
The amount of equity you can release depends on how much your property is worth, how old you are and how much you choose to borrow. Retirement Advantage’s maximum loan-to-value is 52%, for example.
The money you release is usually paid back when you die or if you move permanently into long-term care.
One of the biggest benefits of a lifetime mortgage is the ‘no negative equity guarantee’. This ensures the beneficiaries of your estate won’t have to repay more than the sale proceeds of the house, even if property prices tumble.
HOW DOES IT HELP WITH RETIREMENT PLANNING?
Equity release is becoming an increasingly popular tool for retirement planning.
Retired people have the highest levels of home ownership yet large numbers don’t have sufficient pensions or other assets to provide the income they need.
‘It’s more important than ever to take a holistic approach to retirement planning, and include property alongside pensions, savings and investments. In fact, for many homeowners, property is the most valuable asset they own, so it makes sense to consider it,’ says Alice Watson, head of product and marketing, equity release at Retirement Advantage.
It might be more beneficial from a tax point of view to use property and other investments first before dipping into your pension. This is because pensions can be passed on to your beneficiaries on death free from inheritance tax.
‘Equity release – which essentially provides people with access to additional funds – can be used in a variety of ways to plan retirement, as well as improving someone’s standard of living,’ says Dean Mirfin, chief product officer at Key Retirement.
‘It is tax-free so instead of someone accessing funds in their pension pot, which might be taxable, to repay debt, clear their mortgage or make a significant purchase, they can use equity release.
‘It can also be used as a “pre-inheritance” to help family members buy their first home or pay towards generally helping children or grandchildren at a time when it will make a greater difference.
‘This means that not only is the person who has released equity able to share the impact of the financial boost with them, but they also have some control over how it is used.’
WHAT ARE THE DRAWBACKS?
Equity release has several drawbacks.
One of the biggest risks is that borrowing money against your home via a lifetime mortgage could prove more expensive than downsizing in the long run. It depends on how long you live and what happens to property prices.
The interest rates on lifetime mortgages are significantly higher than on standard mortgages – typically around 5.5%.
If you choose to repay your lifetime mortgage you’ll probably have to pay an early repayment charge.
Another downside of lifetime mortgages is you don’t know how much of your property value will be left to your estate when you die.
With a home reversion plan, you’ll know what proportion of your property will be passed on to your estate, however you no longer own 100% of your property. Your estate won’t benefit from all of the house price growth and if you pass away soon after taking out the plan, you’ll have effectively sold your property cheaply.
It’s also worth bearing in mind the high initial costs of equity release, which are between £2,000 and £3,000 on average.
ARE THERE ANY ALTERNATIVES?
Taking out a lifetime mortgage is a long-term commitment so it’s important to check whether there are more suitable ways of raising money, such as downsizing or using your savings.
Stephen Lowe, group communications director at Just, says if you plan to sell your property and move into sheltered accommodation in five years a lifetime mortgage is unlikely to be suitable.
Similarly, if you expect to receive an inheritance in a few years it will usually be better to wait for that rather than take out an equity release product.
It’s worth ensuring you’re receiving all the state benefits you’re entitled to before going down the equity release route. Just research suggests more than half of retired homeowners miss out on the state support they’re entitled to, with an average of £1,013 unclaimed. (EP)