If you own your own home and you are coming up to retirement age, you may find that equity release is an ideal way to increase your income with no disruption to your living arrangements.
The equity release provider recoups any payments made to you when your house is sold; this could be as a result of your desire to move, after you move into care or when you and your partner die. You will see a reduction in the value of your estate as a result, but you will benefit from increased income in retirement.
There is normally a minimum age requirement of between 55 and 65 years for equity release, although some providers will make exceptions for couples when one person’s age falls slightly outside the required range.
How does equity release work?
Also called a Lifetime Mortgage, an equity release plan involves using your property to generate income in retirement. The money loaned to you will normally be recouped when your property is sold. Depending on the type of equity release product you choose, interest may be applied at the time of sale, or the amount recouped may be fixed when you sign up.
Different plans allow you to generate different amounts. A figure of around 75% of the value of your home is typical.
Why would I choose equity release in retirement?
More and more older people are struggling to make ends meet due to low pension incomes, large debts or inadequate savings and investments. Many people find that they need care as they get older and don’t have the funding to pay for it. Equity release is becoming a popular solution for all of these problems.
Equity release is a really good way to raise suitable funding for an annuity, too. The annuity would then pay you a regular monthly income for the rest of your life.
You may also wish to release money from your home before you die so your children can benefit from it sooner. This may also be advantageous in terms of Inheritance Tax. Of course, you may just want to generate some money to do something you have always wanted to do, such as buying a second property or going on the holiday of a lifetime.
What are the advantages of equity release for retirees?
Equity release allows you to unlock the value of your property while staying resident in it, so you don’t need to move out or sell up. If house prices rise, you may benefit from this as well. And because you can continue to live in your home, there’s no rent to pay.
The money you receive from an equity release plan is normally provided to you as a tax-free lump sum. It’s yours to spend as you wish, but you could also choose to re-invest it, so it gives you a certain amount of flexibility depending on your plans for retirement.
What are the disadvantages?
Taking money out of your property obviously means that the amount you leave to your family when you die will be reduced. Once the value of the loan is taken, plus the cost of interest in some cases, the reduction in the value of your estate could be substantial. You need to ensure you understand all implications of this before you sign up to an equity release plan.
Equity release funds are not taxed income, but depending on your situation, you may need to seek advice on your position. You may also invalidate some benefit claims by receiving a lump sum payment from equity release.
Remember that these types of plans are only available for properties in a good state of repair. Any property that the provider considers to be overly run-down or dilapidated will not be accepted.
What features should I look for in an equity release plan?
Some providers will alter the terms of your plan depending on your health and your personal circumstances. If you don’t smoke and you’re reasonably fit, you may find that you can get better terms on your equity release plan. It’s worth bearing this in mind as you search for a suitable product.
Depending on the housing market and your attitude to risk, you may wish to ensure that your provider will not allow you to slip into negative equity. Some providers will give you a guarantee when you sign up for an equity release product.
Finally, if you are concerned about ensuring value for money, choose a plan that will pay a cashback payment to your estate if you die soon after taking out an equity release product.
Where can I get further advice on equity release?
Before signing up to any equity release product, it is essential that you discuss your options with an experienced insurance adviser who can analyse your own situation. Various charities, such as CCCS and Age UK, advise on equity release products and can conduct a benefits check where necessary.