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Case study: Drawdown to boost income

The problem. Mr and Mrs Jones, aged 65 and 60, have both recently retired and their retirement income is not at a level that they both desired to maintain their desired standards of living.

Apart from an emergency cash fund, they have no other significant levels of savings or investments and their only main asset is the family home valued at £400,000.

The mortgage has been cleared and there are no other debts/liabilities. They want to boost their levels of regular monthly income and do not want to take out any forms of debts or loans and require monthly repayments in retirement. They also feel uncomfortable about giving up the ownership and becoming tenants in their own home. They are not expecting any inheritances.

Issues to look out for:

The need to ensure that any solution is flexible enough to change as the clients’ circumstances change.

If considering equity release, there is the potential that a loan could have an impact on the level of benefits a client can claim.
The need to keep other members of the family involved in any decisions.

The solution

Borrowing from friends or family is not an option, nor is downsizing or moving to a cheaper property, as the couple are settled in their home and have no intention to move abroad.

Although their two adult children are not dependent on Mr and Mrs Jones, they both have families of their own and are not in a financial position to help their parents.

With the couple experiencing a fall in their levels of regular monthly income, one potential solution is a drawdown lifetime mortgage scheme.

When considering any new potential equity-release scheme, it is important to make sure it is flexible and can be modified whenever the couple’s circumstances change.

All family members should be informed and involved in the decision making process, as these types of scheme are likely to significantly affect any potential inheritance for any beneficiaries.

A drawdown lifetime mortgage differs to an ordinary lifetime mortgage. A drawdown lifetime mortgage offers clients greater control over when to take all of your money.

Instead of you releasing all the available funds at the outset, a draw-down lifetime mortgage creates a maximum facility (usually based on age of the youngest applicant and current property value) which allows the clients to take a small amount initially tax-free and then only drawdown further money whenever needed.

It is important to note that interest is only charged on any funds that are released and not on the full facility. This enables the couple to avoid unnecessary debt building up and also prevents them incurring much higher interest on the amount borrowed than they would receive by placing any funds not immediately required on deposit.

Equity-release schemes must meet immediate needs but equally it must also be able to adapt to the future.

Many new equity-release schemes are now a lot more flexible than they were in the past and drawdown lifetime mortgage schemes are now the most popular form of equity- release mortgage currently available.

With this type of scheme further withdrawals, subject to limits, can be taken as often as the couple likes, usually with minimal paperwork and no new legal work. With interest incurring on the actual amount borrowed and not the facility, this enables the couple to preserve more equity in your property.

However, administration charges and the interest rate charges will need to be taken into account when using this facility and some schemes may only offer this facility for a set period of time.

The potential impact on any means- tested state benefits/grants and the tax position of the couple will need to be taken into consideration when using this type of scheme. This can be a potential minefield, so it is vital that as much information is gathered here when advising the clients.

With expected long-term declines in pension annuity rates and the slow death of defined- benefit pension schemes, it seems inevitable, in the longer term, that these types of schemes will become more and more popular with asset-rich, cash-poor retirees.

Aj Somal is an adviser at Aurora Financial Planning



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There is one comment at the moment, we would love to hear your opinion too.

  1. A balanced, well written case study, with my only suggestion being that involving family/beneficiaries is entirely at the client’s discretion. The adviser must merely suggest they be involved, recording & respecting the client’s decision to do so or not. Simon Chalk, Equity Release Planner, Bower Retirement Services

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