Equity release could make up for pathetic pensions

27 August 2008 / by Rebecca Sargent
• If used wisely, equity release schemes could be the key to a fruitful retirement

• Fairinvestment.co.uk offers tips and advice on equity release and avoiding potential pitfalls

As the UK elderly live longer, disappointing pensions are becoming a real issue, which could explain a recent surge in the number of equity release schemes taken out.

Until recently, property had experienced a boom, meaning that many homeowners of pension age are rich in property but have no actual cash to spend. This is where equity release comes in, allowing home owners to take out a loan against a property in order to fund retirement.

There are two main types of equity release scheme available today. The most popular is the equity release lifetime mortgage that allows a homeowner to take out a loan secured against the property. The lifetime mortgage is popular because it means you continue to own your home and you can repay the loan with the proceeds of the sale of your home after death, or if you move out into somewhere like a care home.

When it comes to choosing, there are two types of lifetime mortgages to consider, including an interest only mortgage where you get the loan as a lump sum and pay interest on the loan each month at a fixed or variable rate. Secondly, there is the more popular deferred interest mortgage, where rather than making repayments, interest is rolled up during the mortgage with both capital and accrued interest being repaid when your home is sold.

With both types of scheme, you can choose how to spend the newly acquired capital, for example, buying a new car, carrying out home improvements, going on holiday or supplementing your income. A home income plan, for example, will use the mortgage capital to buy an annuity, which consequently gives you a regular income that is normally fixed for life. Again, you can choose whether to make interest payments or have these deferred.

The other (less popular) type of equity release scheme is a home reversion plan which means you sell part or your entire home to a reversion company or individual. However, this would mean that you no longer own your home but can continue to live there as a tenant of the reversion company or individual. The home is then sold under the same circumstances as a life time mortgage.

According to SHIP (Safe home income plans), the body that represents more than 90 per cent of the UK's equity release business, the sector saw a 14 per cent increase in volumes for the first quarter of 2008.

Sharon Bratley, chartered financial planner at Fairinvestment.co.uk, said: "The increased interest in equity release is hardly surprising given the current financial climate. Pensioners are finding it tough and releasing equity from property may be the only way to survive through retirement for some.

"However, an equity release scheme should not be taken out lightly," she warned, "Remember, this is your home you are dealing with and you should seek extensive advice before taking out any kind of loan on your home.

"Equity release is now regulated by the Financial Services Authority (FSA) so is a much safer game than it has been."

Because equity release schemes are normally only available to those over 55, they could offer the perfect way to fill the gap between a low pension annuity and a previous salary.

However, there are a few equity release drawbacks and questions to ask before taking out a loan on your home and largest asset, including:

• Will your loved ones mind if they do not have your house after death? Conditions of most equity release schemes are such that your house must be sold in order to repay the loan

• Is it worth it? Interest rates can be high and cost more than you thought so it is worth looking into other cash raising avenues that may cost less in the long run. If you are looking at lifetime mortgage plans, it is also worth thinking about whether you would rather pay interest monthly or have the interest rolled up and added to the amount owed on the sale of the property

• What happens if you want to sell or move? Again schemes vary but make sure you check before taking one out that your policy can be transferred to another property if you think you will want to move at some point in the future. With a home reversion plan, you are selling part or all of your house and so the proceeds, if any, on sale may not be sufficient to purchase another property.

• How can you make sure you get the best equity release scheme? Look for policies that carry the SHIP logo which promotes safe equity release schemes. Those that have this symbol offer guarantees, including the right to live in your property for life, the freedom to move to another property without penalties, and that you will never owe more than the value of your home.

• Could it affect your income tax position and entitlement to state benefits? It is worth looking into this as an equity release scheme could affect you if you claim means tested benefits. Having newly acquired capital could affect your entitlement.

Fairinvestment.co.uk's equity release service is keen to promote Safe Home Income Plans (SHIP).

Mrs Bratley added, "Some of these questions can easily be overlooked and if they are, equity release could end in tears. I cannot affirm enough the importance of getting independent advice when it comes to equity release schemes."

Fairinvestment.co.uk offers equity release advice from regulated advisors, as well as a comparison and quotes service allowing you to compare interest rates and payment types against each other.