The Equity Release Council has published a White Paper, called Unlocking The Potential: The Future of Equity Release, which outlines how housing wealth can be used to provide additional income in retirement or later life. In particular, it provides ideas about how equity release can enable the Government to support the aging population in the UK.
The report details tactics the Government could use to incorporate Equity Release as part of people’s retirement income. There are seven specific recommendations that The Equity Release Council suggests the Government should consider.
This is a very important report from The Equity Release Council because it provides a list of recommendations that can easily be implemented by the Government. Equity Release is still suffering from a poor reputation since the 1990s yet house prices have climbed substantially in the last twenty years.
For most people in retirement, their biggest asset is their home and it continues to increase in value. Many people in retirement experience a shortfall in income which is likely to continue into the future. Equity release can play a major role in meeting the shortfall if it is sold and regulated in the correct way, and if the Government includes it in a holistic retirement strategy.
Full information about the White Paper can be found here.
The White Paper can be downloaded here.
There are a number of options available to you for the provision of income in your retirement. Changes to pensions that were introduced in April 2015 – the so called pension freedom – has resulted in greater flexibility with your pension pot. Here are the options available to you:
Buy An Annuity
An annuity is a form of insurance contract that provides you with a fixed or increasing income in exchange for a lump sum. Annuities have been out of favour in recent years because of the poor interest rates that have been available. However, they still provide a secure a form of pension income because you will know exactly how much money you will be receiving each month and the there is no possibility that the amount of money you receive will be less than has been specified – unless the insurance company providing the annuity defaults.
You can use all of your pension pot to purchase an annuity or you can take the tax free cash lump sum and use the remainder of your pension to fund the annuity. The larger the amount of money you have available, the larger the annuity.
There are a number of factors that determine the amount of money you can receive and these include:
- Your health – people with poor health or chronic conditions may be eligible for an enhanced annuity which means that they will receive more money than a conventional annuity due to their lifespan of being reduced.
- Single or joint life – annuities can be purchased for one person or for two people, eg a married couple.
- Guaranteed period – you can specify how long the annuity will be paid for, and this is particularly helpful if you would like to guarantee an amount of money to your spouse or other beneficiaries.
Flexible drawdown is a method of taking money from your pension in a way that is convenient to you. There are three ways of doing this:
- Take the whole a pension in one go – you will be able to take 25% of the total as a tax free lump sum and the balance will be taxed as earnings at your marginal rate. You should be aware that taking your entire pension pot in one go may means that you move into a higher tax bracket and therefore have to pay more tax.
- Flexible drawdown – your initial withdrawals from your pension would form part of your 25% tax-free cash. Once this has been fully used, the remaining payments will be taxable at your marginal rate.
- Uncrystallised Funds Pension Lump Sum – if you do not need access to your full tax free cash, you can withdrawal individual payments as and when you require. Each payment will have a 25% element of tax free cash and the balance will be taxable income at your marginal rate.
Equity release can be regarded as a way of supplementing your retirement income if you have a property with little or no mortgage. It should not be regarded as the sole means of your retirement income but can provide cash when you want it.
There are essentially two forms of equity release product:
- Lifetime mortgages – these are designed for you to borrow money from a large financial institution in exchange for a loan that is secured against your house.
- Home reversion plans – these are designed to enable you to sell a share of your home to a financial institution in exchange for cash.
There are numerous variations of these products including;
- Enhanced equity release which can result in higher pay-outs due to chronic health conditions
- Drawdown versions that can provide you with money when you need it and reduce the potential costs of taking all the cash in one go
- Options to take income instead of a lump sum, or in addition to a lump sum.
Seek Qualified Advice
You should take advice from independent financial advisers whenever you are considering your retirement options.
If you are over 65 years old, own your house and need to raise funds to help enjoy your retirement, you might like to consider the use of a Home Reversion Plan. Here is more information about the way these kind of Equity Release products work:
What Is A Home Revision Plan?
Home Revision Plans are designed to let you use some of the money that`s tied up to your house. There are no restrictions on what you can use the money for and you have the advantage of being able to stay living in your own home whilst you enjoy spending it.
How Does A Home Revision Plan Work?
A Home Revision Plan works like this: you sell a share of your house to a financial company (usually a large insurance company) for less than its market value. In exchange for your sale, you will receive a tax-free lump sum or regular income. You will be a tenant of your home and you might need to pay a small change for rent each month.
When your house is sold, usually when you die or move into long-term care, the insurance company will get their share from the proceeds of the sale. Where you have sold a share of your house instead of the whole amount, the remaining share will be sold and distributed in accordance with your will, if you die, or according to your requirements if you move into care. You will therefore continue to benefit from any increases in the value of your home.