If your retirement income may fall short, equity release could be one option. Other choices might suit you better.
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More than half of UK savers doubt their retirement savings will cover their needs. For some, the shortfall may mean drawing extra income from their property.
Equity release plans are one common route. They let homeowners convert part of their home's equity into tax-free cash payments.
LV= found that 58% of non-retired UK adults - nearly six in ten - doubt they will save enough for a comfortable retirement. Another 39% said they would consider drawing on property wealth to supplement their retirement income.
Lucie Spencer, a partner at wealth manager and financial planning firm Evelyn Partners, cautioned that equity release will not suit everyone. Depending on the circumstances, using other assets could cost less, so people should weigh those alternatives before deciding.
What is equity release?
Equity release lets you turn some of the value you own in your home into tax-free cash.
Your equity is the share of the property that belongs to you. If you still have a mortgage, it is worked out by subtracting the remaining mortgage balance from your home's current market value.
If your home is valued at 300,000 and you still owe 50,000 on the mortgage, you have 250,000 in equity.
You can release that money all at once, withdraw it gradually, or use both approaches.
Equity release is generally available only to people aged 55 or older.
The money comes from a loan secured against your home. Interest is added, and the balance is usually repaid after your death or when you move into a care home and the property is sold.
There are two kinds of equity release: a lifetime mortgage and a Home Reversion Plan.
Lifetime mortgages are widely used and generally carry a fixed interest rate for the loan's entire term. The debt is repaid by selling your home after you die or move into care; any money left over goes to your beneficiaries.
With a Home Reversion Plan, you receive a lump sum by selling part of your home. When the property is eventually sold, the equity release company takes its agreed share, and the rest goes to your estate.
Could your property help fund retirement?
Releasing some of the equity in your home might provide retirement income, or allow you to give money to someone close to you.
There are advantages, but also drawbacks to weigh up.
Pros
With most lifetime mortgages, you do not need to make monthly payments. The loan, along with the interest added over time, is usually repaid only when you die or move into a care home.
Some plans allow monthly payments. Making them can reduce the balance and limit the interest that builds up, leaving less to repay later.
Equity release reduces the value of your estate, which may also reduce the inheritance tax (IHT) your beneficiaries owe.
You can stay in your home, too.
Spencer of Evelyn Partners said: "Staying in the family home for longer gives you access to funds you can use to improve your lifestyle or cover other spending. You do not have to withdraw the full amount at once; smaller payments are an option."
Cons
Borrowing against your home can become much more expensive over time. Take out the loan early in retirement, and the growing interest may leave your beneficiaries with less - or reduce what you can afford to spend on care.
Spencer warned that, as interest accumulates, the equity release company could eventually claim the entire property. Compounding debt may leave children and other relatives with far less of the estate.
Some equity release plans include a no-negative-equity guarantee. If yours does, the amount owed when the property is sold cannot exceed its sale value, so your estate will not have to cover the shortfall. Check whether the plan you are considering includes this protection.
Equity release can also be expensive to repay early. Some plans charge a fee even if you only want to clear part of the loan before the agreed date.
It may affect your entitlement to means-tested benefits based on income, including Pension Credit.
Your beneficiaries may also be caught off guard when they learn that the equity release must be repaid after your death.
Spencer said: "I would really stress that you should involve the family members who will handle your estate or benefit from it after you pass away."
"Most complaints about equity release arise when the children weren't told that their parents had taken it out."
Some providers also impose conditions before releasing money from a home's equity. These might include bans on smoking indoors or requirements to repaint the property.
Spencer said, "You've effectively handed them a share of your house. It remains your property, but they can impose conditions requiring you to maintain it to a certain standard so they can recover their money."
Spencer urged anyone considering equity release to seek advice from a financial adviser authorised by the Financial Conduct Authority.
She added: "I'd strongly recommend choosing an adviser who belongs to the Society of Later Life Advisers and has specialist knowledge of equity release."
What are the alternatives?
Downsizing
Moving from an expensive property to a cheaper home may release some of your equity and reduce regular costs such as council tax and energy bills.
The move itself will cost money, so include conveyancing, survey, removal company, and estate agent fees in your calculations.
Spencer said: "Many clients choose to downsize because it removes the risk of high interest charges building up.
"They also know their family will still inherit the estate, with all the money remaining in it."
Retirement interest-only (RIO) mortgages
These mortgages typically target borrowers aged 50 and above. Like other interest-only loans, they require monthly interest payments, while the original amount is repaid when the home is sold.
They may cost less than lifetime mortgages because the interest does not accumulate monthly, so the amount owed does not swell before the property is sold.
"It's not the same as interest rolling up until you could lose the whole value of your house," Spencer said.
Spencer explained that the loan proceeds could be given to someone you care about; if you survive the gift by more than seven years, it will no longer count toward your estate for IHT purposes.
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