This content is for information and educational purposes only. It should not be taken as financial advice or investment advice. To receive tailored, regulated financial advice regarding your affairs please consult us here at Hanson Financial Services (financial advice in Liverpool).
How can I afford retirement? For many people, a natural point of call is the home. After all, your property is likely worth £100,000s. If you could somehow access that value whilst continuing to live in your home, then this could help free the money you need to fund your retirement lifestyle. This is, essentially, how equity release works. For over-55s, it lets you access the equity in your home (tax-free) without requiring you to sell the property. Below, our team at Hanson Financial Services (financial advisers in Liverpool) explains how equity release works, the pros and cons and how it can fit into a retirement plan.
How equity release works
It might sound strange that you can get money out of your property whilst continuing to live there. Here, it is important to understand the two main types of equity release: the lifetime mortgage and the home reversion plan. The first is the most popular option and involves borrowing some of your property’s value (from a lender) at a fixed/capped interest rate. Here, you can take all of the money as a lump sum or in gradual “pieces” over time (i.e. “drawdown”).
The second involves approaching a provider who pays you a lump sum for your home; under market value. You can then continue living in the property until your death, at which point the proceeds are split between you and the provider according to ownership. For example, imagine you sell 50% of your £230,000 property in exchange for a £60,000 lump sum. This is a massive discount to what 50% of the home is really worth (i.e. £115,000). However, suppose when you die the property is worth £350,000. The 50:50 split would result in £175,000 to the provider.
Should you downsize?
Equity release is a big decision and so it is good to discuss the option with a financial adviser to weigh this in light of other options. In particular, could downsizing be a better alternative? Here, you can sell your home and move into a smaller, cheaper property – allowing you to keep some of the proceeds to help fund your retirement. This can even be a more practical option for older people who could do with fewer stairs and home maintenance tasks to do. However, this option comes with its own potential drawbacks. Moving is not cheap and relocating to another area could involve further distance from friends and family.
Implications for retirement planning
Bear in mind that equity release can be costly. Average interest rates on lifetime mortgages, for instance, are 3-4%. Whilst these are historically low, they are still higher than rates offered by standard mortgages. Downsizing, instead, could end up being cheaper in the long run.
Equity release also has implications for your estate plan, since much of the equity in your home will be going to a provider – rather than your beneficiaries – when you die. Downsizing, again, has an advantage here in that you still own your home when you die, allowing you to pass it down to your loved ones.
Ideally, therefore, it would be better to have alternative assets and savings available to help fund your retirement rather than relying on the equity in your home (which could, instead, be a useful “last resort”). This involves asking yourself two key questions ahead of time: “How much do I need to retire?” and “Am I on track to achieve this?” This is where you could examine different options with your financial adviser including building your state pension, workplace pension, ISA(s) and personal pension(s).
If, however, you are currently in retirement (or very close to it) – meaning you do not have time to build up these other assets to a sufficient amount – then be mindful of some important tips before approaching a provider:
- Beware of borrowing everything up-front. The earlier you borrow (for a lifetime mortgage) the more expensive this is. Consider borrowing the lowest amount you need in the short / medium term, and wait until later if you need more in, say, 20 years.
- Be mindful of benefits. When you have cash (e.g. from an equity release lump sum) rather than a property this can affect the benefits you can access – such as universal credit and pension credit. If you rely on these for income, be careful.
- Seek professional advice. Equity release has far-reaching implications not only for your home but for many areas of your financial plan. It can help, therefore, to seek the help of a professional to advise on the decision and ensure you do not inadvertently undermine these other areas. You could speak to a financial adviser about this or a Member of the Equity Release Council.
Conclusion & invitation
Are you interested in talking to a financial adviser about your pension and investment planning needs? We’d love to assist you here at Hanson Financial Services.
Please contact us to arrange a consultation with our team – free and without obligation – to gain more clarity and peace of mind over your financial plan.
You can call us on:
Liverpool Office: 0151 708 7616
Manchester Office: 0161 401 0991
Chester Office: 01244 960 039Or email via: [email protected]