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Please release me

I am looking to release equity from my property as I do not have enough income or savings to maintain the lifestyle I want. Can you please explain my options?

There are few options for those who have retired to increase income from their pensions or investments. However, many retired people who manage on a small pension and limited savings are also living in properties which have greatly increased in value.

Equity-release plans called lifetime mortgages or home-reversion plans can provide you with a lump sum or regular income by releasing money against the value of your home, with the amount released being repaid from the sale proceeds after your death.

You will need to be at least 60 and have no outstanding mortgage or you will need to use the equity released to pay down any existing debt. It will be assumed that your property is desirable and will be kept to a high standard while the equity-release scheme is in place.

However, equity release will not suit everyone and it is worth considering whether funds could be raised affordably from other sources before going down the equity-release route. In some cases, you could risk losing state benefits and may have to pay extra tax on any income produced.

A taxation upside of equity release is that it is a perfectly legal way of mitigating inheritance tax. If you do not have children or family to leave your property to, then equity release might seem an even more attractive option.

The FSA now regulates lifetime mortgages and many new providers of these products are entering the market. You simply borrow a lump sum secured against the value of your home, with the capital and rolled-up interest being eventually repaid out of the sale proceeds.

A lifetime mortgage may be suitable for you as the amount you owe is fixed, so any increase in the value of your home belongs to you or your family. It may be appropriate to buy an annuity although rates are low.

Home-reversion schemes have been less popular over the last few years but we are beginning to see new reversion products being brought to market.

I will explain how reversion schemes work. You sell your home or a share of it to a reversion company for a lump sum or in return for a monthly income or a combination of both. Technically, you become a tenant living in your own home rent-free, or sometimes for a nominal rent, for the rest of your life. When the property is sold, the reversion company gets its money back.

You need to work out how much equity you should sell because if you sign over a big percentage, say, 50 per cent of your property to the reversion company, it gets 50 per cent of the proceeds including any growth in value of your property. In addition, the reversion company will also only pay you a percentage of the current market value for the share of your property it buys. This is because you get to carry on living in the property until you die and the company may have to wait years for its return.

If you sell all your property to the reversion company, you will typically get between 30 and 60 per cent of the market value. The actual figure will depend on your age and your partner’s. Older people will get more and men get more than women due to the mortality differences.

Reversion schemes are often popular with clients as they know at outset what share of their home (if not its value) will be left to their family. Reversion schemes can also provide more cash than a lifetime mortgage.

If your needs change in the future, you can take extra cash advances, depending on the amount you originally took.

For those who are considered impaired lives, such as smokers or those who are ill, the amount may be bigger.

Criticism is often levelled at home-reversion plans because if you die soon after taking out a plan, you could eff- ectively have sold off your home on the cheap. To counter such comments, some schemes give families a rebate if you die within the first few years of signing up or if you need to pay for long-term care.

Home-reversion schemes are not yet regulated by the FSA but hopefully soon will be.

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