ER Plans - IFA | Retirement Plus

Equity release plans – an overview for retirement planning purposes

The issues surrounding pensions in the UK affect us all, but it is already a very real and daily challenge for millions of retired Britons. However, many retired people who manage on a small pension and limited savings are also living in properties which have increased in value. With the average house price in England and Wales now standing at £185,616* (April 2008), people may not be fully aware of the true value of their home.

Equity release plans – also called lifetime mortgages, home reversion plans or home income plans – are a way of releasing cash, whether to buy that new car, to pay for a holiday or for home improvements, or simply to make daily life more comfortable. These schemes essentially allow you to release money against the value of your home, with the debt being repaid from the sale proceeds after your death.

How they work
While there are a range of different schemes offering lump sums and/or regular income, they all work on the same principle: they either lend you, or they buy a right to, a part of your home’s value in return for a share of the proceeds when you die. In most cases you will need to be a homeowner, at least 55 years old, have no outstanding mortgage (or you will need to use the equity release money to pay off the existing loan), and own a property in reasonable condition.

Equity release plans can be complicated products and are a major step for many people. Your house is almost certainly the most expensive asset you own; it is also your home. Good advice is therefore, key. Age Concern and the Financial Services Authority (FSA), the UK’s chief financial watchdog, both recommend seeking independent financial advice and independent legal advice before proceeding.

An Independent Financial Adviser (IFA) will look at your overall finances to see if equity release is really suitable, help find the right type of scheme – bearing in mind that in some cases you could risk losing any State benefits and you may have to pay extra tax.

Equity release plans – their attractive features. They can give a lump sum, a regular income or both. The lump sum could be tens of thousands of pounds; the income boost might be worth as much as a hundred pounds a month or more. Money released from the value of your principle residence is free of tax, although if the cash is then invested there may be tax to pay on any income or growth. You do not have to move house or sell your home to unlock equity. With reputable equity release providers who are SHIP** (Safe Home Income Plans Ltd) members, there is a guarantee that you will be able to continue to live in and enjoy your home until the day you die – and in many cases still be able to leave something of the property’s value to your family. However, you should note that many schemes require the property to be sold if and when you move into long-term care.

Of course, if you don’t have children or family to leave your property to, then equity release might seem an even more attractive concept. The money can, of course, also be a way of cutting inheritance tax bills. Inheritance tax (IHT) kicks in at 40% on everything left behind over £312,000 (£624,000 for married couples) (2008/2009). Importantly, those figures include the value of your home. The value of many properties means that IHT is no longer something only the rich have to pay. Equity release plans are a perfectly legal way of mitigating inheritance tax. They could be used, for example, to give a child or grandchild the deposit to buy their own property. Because this is a tax matter you should ask an IFA to advise on your circumstances.

Equity release plans can also be used to pay for care bills without having to sell up at what can be a traumatic enough time. Equity release will not suit everyone. It is always worth considering whether funds could be raised affordably from other sources before going down this route.

Types of equity release schemes - here are the main equity release schemes with some of their pros and cons:

To understand the features and risks, ask your financial adviser for a personalised illustration.

Standard home reversion plans
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, albeit with the right to continue living in your home rent-free (or sometimes for a small, peppercorn rent – say £10.00 per year) for the rest of your life.

When the property is sold – usually when you die – the reversion company gets its payout. If, for example, you sold 50% of your property to the reversion company, it gets 50% of the proceeds – including any growth. If you sold 25% of your property, it gets 25% of the proceeds, and so on. At the start of the home reversion plan, the reversion company will 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. The amount you receive is based on your age, gender and health (and your partner’s). Older people will get more, and men get more than women – because of differences in how long they are expected to live.

Pros

No ongoing repayments to make, the reversion company must wait to receive any money until the property is sold
You know at outset what share of your home (if not its value) you will be leaving to your family
You continue to share in any rise in the value of your property (unless you have sold its entire value).
You can usually sell a further share of the property, if you had retained a share at the start
If you have a serious illness, you may be able to get a bigger payment

Cons

The reversion company will buy at a discount to the current market value
If you die soon after taking out a plan, you could effectively have sold off your house (or a share of it) on the cheap. Some schemes give families a rebate if you die within the first few years of signing up
Some reversion companies can be choosy about the properties they accept

Home reversion plans from Retirement Plus operate in a different way to standard home reversion plans

Competitive with both standard home reversion plans and with lifetime mortgage schemes, Retirement Plus offers a range of equity release options which are flexible and fair, for clients aged 65 or over, looking to raise equity from their property. The Retirement Plus Property Plans have no upfront discounting and enable you to raise large sums whist still offering flexibility for future life changes. And, because their share of your property increases over a long period you continue to own your share of the property for longer – which means your estate can benefit. You also have the advantage of being able to sell your property or cancel the plan at any time should your circumstances change for better or for worse. Retirement Plus believes that equity release can be a very useful tool for retirement planning purposes and offers the following range of home reversion plans:

Classic Property Plan
This is the plan to compare with lifetime mortgages - especially with the current uncertainty about future house prices.

Higher Release Property Plan
Compare this plan to a standard home reversion – release a higher sum than with the Classic plan. The Retirement Plus share will grow faster but you set the maximum level it could ever reach.
Impaired Options
Retirement Plus can offer more money for those people with impaired lives - on their entire product range.

Pros

No ongoing repayments to make, the reversion company makes all of its money when the property is sold
You know at the outset what share of your home (if not its value) you will be leaving to your family
You continue to share in any rise in the value of your property (unless you have sold its entire value)
The unique structure of the plans ensure your estate is not penalised should you die earlier than expected
You can take extra cash releases, depending on the amount you originally took
No cancellation penalties with these plans (you will have to pay an administration fee and the legal costs involved)
If you have a serious illness, you may be able to get a bigger payment

Cons

Properties they accept are flexible but must fit their plan criteria
Further releases are not guaranteed

Lifetime mortgages
The lender gives you a lump sum or monthly income (or both). You pay nothing – the interest is ‘rolled up’ into the loan. The amount borrowed plus this interest is repaid out of the proceeds from the sale of the property after you die. How much you can borrow depends on the value of your home and your age – the older you are, the higher the percentage of your property’s value you can borrow.

Pros

No interest payable while you are alive, so you will get a higher income for the same sized loan than with an interest-only mortgage or home income plan
Most loans are fixed-interest, so reducing uncertainty about how much you will owe
Plans are available to people as young as 55
Drawdown or staged payment options are common

Cons

Interest can mount up quickly and will further reduce what your family will inherit
Your family could end up with nothing from the sale proceeds even though the lump sum you were lent only seemed a fairly small proportion of the home’s value at the start
Property values may go up or down but the interest rate you agreed at the start on the loan is still payable and keeps accruing
You may not be able to get a top-up loan later
You may have to fund a retirement period of over 35 years if you take out a plan at 55
Drawdown facilities are not guaranteed by all providers
Generally, less money is available than you’d receive with a home reversion plan

Interest-only mortgages
You borrow a lump sum secured against the value of your home. You pay interest each month, but you have a lump sum to spend as you wish. The capital is eventually repaid out of the sale proceeds.

Pros

The amount you owe is fixed so any increase in the value of your home belongs to you or your family
You can borrow at a fixed rate so you know exactly what you have to pay every month

Cons

You need to be able to afford the ongoing interest payments: you should think about investing the lump sum you borrow.
Some schemes involve buying an annuity. Because annuity rates are so low and they increase with age, these schemes are often only suitable for elderly homeowners
Variable rate loans can be very risky: your payments could rise more than your pension or other income.
Generally, less money is available than you’d receive with a home reversion plan.

Home income plans
These used to be the most popular type of equity release plans. You take out a mortgage against your home and use the money to buy an annuity which guarantees you an income for life. Mortgage payments are deducted from this monthly income, although the original capital is only repaid from the sale proceeds, normally after you die.

Pros

Regular income for life, and the mortgage interest is deducted automatically.
The amount you owe is fixed and any increase in the value of your home belongs to you or your family

Cons

Not suitable for those looking for a substantial lump sum
Income is normally fixed at outset, so will be eroded by inflation
Built-in annuities are not the most competitive – you are generally better off shopping around for an annuity (if the plan permits this) or investing the money elsewhere

Important points to think about
Your family - whilst it should ultimately be your choice whether to sign up to a scheme, it is a very good idea to discuss it with close family members and/or anyone who might have expected to inherit your home. This may help avoid any unpleasantness or misunderstandings.

If the property has been a family home for a long time, bear in mind that your children or other relatives may also have an emotional attachment to it. They may even have been thinking of living in the property after you die. Children or other relatives may be prepared to help you out financially instead of you taking out an equity release plan. They could then inherit the whole property. Ask your Independent Financial Adviser (IFA) to advise or arrange advice for you on any tax issues involved.

Alternatives - you may have other assets or investments which could boost your income or give you the lump sum you need. An IFA should be able to take a holistic view of your finances.
Consider, too, whether moving to a less expensive property might be a better way of releasing money tied up in your home – rather than letting an equity release company profit from your bricks-and-mortar investment.

State benefits - if you receive or may receive means-tested State benefits, these could be reduced or lost altogether – which in turn could mean having to pay more for things like dental treatment and glasses. Check the rules with your IFA before you take out any equity release plan.

How to reduce risk - look for plans carrying the SHIP logo (for Safe Home Income Plans). SHIP (0870 241 6060) is an industry body set up to promote safe equity release schemes. Companies who are members provide a number of guarantees, including: you will have the right to live in your property for life; the freedom to move to an alternative property without penalties; and that you will never owe more than the value of your home.

If the scheme’s income comes from an annuity, you’ll get a better rate the older you are.
If you are just retired, it may be worth waiting a few years before signing up to an equity release scheme in order to get a better deal. Equally if you are very old or in poor health you should think carefully about schemes paying monthly incomes – you may not live long enough to get a decent return – but you are, of course, preserving your assets.

Costs - the equity release market is becoming more competitive. Most equity release plans involve paying valuation and legal fees, although in some cases these may be refunded, assuming you go ahead. There will be fees to pay to your financial and legal advisers. You remain responsible for insuring your home, and will still have to pay the Council Tax. You must also maintain your home to a reasonable standard.

Can you move? - you may want to sell your house at a later date and move somewhere smaller or more suitable for your needs. In some cases you cannot, without facing penalties - but it’s worthy of note that members of SHIP** guarantee you the portability of their products to another suitable property. You should, therefore, check at the outset whether any plan you are considering allows you to transfer it to a new property or not.

Can you sell up? - you may, of course, want to sell up completely, to move abroad or maybe into rented sheltered housing or into a care home. Note: some lifetime mortgages carry huge early cancellation charges; some home reversion products could face you with some big losses, depending on when the plan is taken out and where in the cycle you are. You should check on the details of each equity release plan to see whether there is a penalty if you end the scheme before death.

Advice - getting independent financial and legal advice before taking out an equity release plan is recommended by SHIP**, the charity Age Concern and by the FSA, the UK’s chief financial watchdog.

Author: Zoe Hyde Dated: 01 May 2008

*House Price Source: www.landreg.gov.uk/houseprices/

** SHIP is the trade association set up as a self regulatory body. All member companies have to abide by a strict code which includes:

To provide fair, simple and complete presentation of their plans, together with the benefits, obligations, variables and limitations. This includes all costs which your client has to bear in setting up the scheme, plus the position on moving, the tax situation, and the effect of changes in house values
To ensure the client's legal work is performed by the solicitor of their choice. In all cases, prior to the completion of the plan the solicitor will be provided with full details of the benefits the client will receive. The solicitor will be required to sign a certificate to the effect that the scheme has been explained to the client
To clearly state the main cost to the householder's assets and estate e.g. whether part or all of the property is being sold or how any loan amount will change
To carry a "no negative equity" guarantee

The views of the author are not necessarily those of Retirement Plus.