There have been an awful lot of articles in the press and on the news during the last year regarding the cost-of-living crisis, and its implications for people.
2022 has been a tumultuous year with numerous Bank of England base rate increases, inflation hitting double figures, and the country entering recession, all of which is putting millions of pensioners into financial difficulties.
With all these things happening, I thought it would be a good idea to investigate whether or not Equity Release could be used to support people in their retirements. I have done some research, so let's look into this in more detail.
What is Equity Release?
Before we start, it is probably a good idea to give a quick explanation as to what Equity Release actually is. In simple terms, Equity Release is a way for homeowners over 55, whose property is worth at least £70,000, to release tax-free cash from their homes whilst they are still living there. There are restrictions on the types of property that may be eligible for equity release.
There are two types of equity release products:
A lifetime mortgage is a loan secured against your property that runs until you either enter permanent, long-term care or you die. This is the most popular product and is available to those aged 55 and over. There are a number of different types available and you are not required to make any repayments, but you can if you wish to. If you decide not to make repayments, the interest is added to the loan amount and can quickly increase the amount owed. When you pass away or move into long-term care, your home will be sold, and the money made from the sale will pay off the rest of the loan. Anything left over will be left to people in your will.
A home reversion plan allows you to exchange the ownership of some or all of your property for a lump sum of cash, along with the right to stay in your property, rent-free, for as long as you live subject to the lender’s terms and conditions. For this product, you need to be aged 65 and over. These plans involve the sale of part, or all, of the property and would result in a change to the title deeds and the sale will only achieve a percentage of the property value at below market value. This part of your home would belong to someone else while you continue to live in it until you pass away or move into long-term care. When the house is sold, the money is split based on the percentages you and the lender owns.
How can Equity Release be used to support someone in their retirement?
The cost of living crisis can be especially hard for people who are close to, or who have already retired. High levels of inflation, which we are currently enduring, can rapidly erode the value of pensions and savings, and in addition, these people have limited, or no time to build their financial resources once they stop working. As a result, I always recommend that people look at all the options that are potentially available to them to make their day-to-day lives easier. Here are just a few ways that Equity Release could be used to support someone in their retirement:
Pay off an Interest Only mortgage and/or unsecured debts to reduce monthly outgoings
There are currently over a million Interest Only mortgages outstanding in the UK, and some of these homeowners will be unable to repay the outstanding capital when their mortgage ends. A number of my clients in this situation felt that their only option would have been to sell their family home, however there can be other solutions, such as equity release, that may be available. Payments towards mortgages, loans, purchases on credit, and debt become more difficult when someone retires. Equity Release could reduce these outgoings with a plan that doesn’t require monthly payments. These will be paid off from the cash locked up in your home after you pass away. You will have noticeably more cash flow and a retirement with more flexibility and freedom.
Adapt your existing home if your health circumstances change
As we grow older we sometimes also need to make improvements to our homes to meet our changing needs. Whether it is installing a stair-lift, building a walk-in shower or adding handrails and other safety features, Equity Release could enable you to continue to live independently in your home for many years to come.
Add to your pension, or make it your alternative pension
If you are struggling to live on your pension income, Equity Release could allow you to top up your pension with a lump sum of cash or smaller monthly payments from the equity locked up in the value of your home.
Your pension isn’t part of your taxable estate concerning inheritance tax. You can use Equity Release to actually fund your retirement as a tax-free alternative to your pension. If you don’t withdraw your pension, you can see additional growth on your investment. Your pension pot can be protected and passed down to beneficiaries of your Will, free of inheritance tax.
Improve your standard of living
As the cost of living crisis has begun to affect everyone’s lives, I have seen a decline in people releasing the equity in their property for luxuries, such as holidays or campervan purchases. My clients are releasing equity for more pressing needs, such as moving home, gifting to family members for house deposits, or simply making use of released money to supplement their income, however that doesn’t mean that Equity Release can’t be used to fund your dream lifestyle.
What advice would I give my clients?
The most important thing to remember when it comes to equity release is that deciding to take out a plan is a major financial decision. It is important to take independent financial advice about this decision, and your own financial circumstances, and what you hope to achieve through equity release will need to be considered in detail. Equity Release is not the right solution for everyone, so having a no obligation consultation will help establish what is going to be right for you.
I encourage all of my clients to involve their families in all discussions regarding Equity Release. I find it useful to get their feedback on discussions, and the overall process is made easier if families are aware that an Equity Release plan is being taken, especially if the plan holder passes away.
An Equity Release plan is not the only option if you wish to free up some cash in retirement. Downsizing the property or borrowing money from a close friend or family member could be a preferable alternative to releasing equity from your home. Releasing capital from your property will reduce the amount of inheritance that can be left and may impact the receipt of any means-tested benefits.
If you want to find out more about Equity Release and whether it is right for you, please click on the link below to get in contact with me.
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