Pensions Advice, Retirement Planning - Investment Financial Adviser Dunfermline, Fife, Scotland UK

Posted by William on July 4th, 2008 in UK Financial Advice

Hi everyone,

today I thought I’d discuss an avenue open to those with wealth tied up in their properties, but who feel themselves to be stuck between “a rock and a hard place”. This is because the monthly income levels you’d predicted would allow you to feel comfortably well off in retirement really don’t match todays high cost of living after all.

It’s pretty galling to have worked and planned all one’s life to enjoy freedom from work, and finally be able to pursue one’s passions (like golf, or salmon fishing in some exotic location!) only to end up held back by mounting money concerns in your old age.

The problem is that when we’re at that age - dreams can’t be put on hold anymore, because there’s no time left to do all the things we really want to do is there?

The issues surrounding pensions in the UK affect us all, but with inflation beginning to bite, millions of retired Britons are really beginning to struggle with spiraling food and fuel costs making life even tougher.

In fact as we speak some analysts are predicting a ’standard’ oil price of $200 a barrel! It’s already over $145 - and it’s not just petrol it affects either, because oil is the basis for pretty much all of our plastics manufacturing these days too. (By the way how much plastic do the super markets need to wrap around everything we buy now - sheesh, don’t get me started on that!).

So if it looks like things could get more challenging still for you - don’t worry a simple solution may present itself to you in the form of what’s known as ‘The Lifetime Mortgage’.

It works like this…

Many retired people who manage on a small pension and limited savings are also living in properties which have soared in value in recent years (even allowing for the present downturn). The average house price in the UK is now standing at £218,112 (May 2008), and many people may be not be aware of how much equity they have in their homes.

Many of my clients who are in their forties and fifties and have a lot of excess value in their homes sometimes mention that they will simply downsize when they come to retirement. However, the reality is that it is a very difficult thing to do later, when left too late in life because your home holds sentimental as well as financial value.

Many love their homes for this reason and are reluctant to downsize but they’d still like to unlock some of the value of their prime assets so they can enjoy their retirement more. Equity release schemes (aka Lifetime Mortgage) can provide the platform to do this.

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

So How Do 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 lend you a part of your home’s value in return for a share of the proceeds when you die - hence the term ‘Lifetime Mortgage’.

You generally need to be 60 years old plus, have no outstanding mortgage (or you will need to use the equity release money to pay down the existing loan), and own a property which is in reasonable condition.

Equity release plans can be complicated products and are a major step for many people to take. Your house will probably be the most expensive and valuable asset you own; remember it is also your home. So good advice is hugely important for obvious reasons.

Age Concern and the Financial Services Authority both recommend getting independent financial advice before proceeding.

Remember - Safety First

There are no shortage of schemes on the market promising to help you get the lump sum or monthly income you’re looking for via equity release - but do they deliver?

The answer is yes, they can - but you will need to do some thorough homework before investing. And let me also say at the outset - a number of people will find home equity release schemes are just not suited for them and their circumstances.

Questions you must ask…

• Does the scheme allow you to move house if you need to? In the future it is possible you might want to move into sheltered housing or need residential care, or even move to be nearer to your family.
• How long do you expect to live? People in their 60s and 70s usually benefit most from monthly cash payments. If you are older you may receive less from this kind of plan before you die relative to the value of your home.
  
• What do your family expect to inherit on your death? If you use your property for home equity release you will not be able to leave it to your family, and this will reduce the total value of your estate on your death.
• Are you living with a younger partner, relative or friend? Depending on the terms of the scheme, they will need to find alternative housing in the event of your death.
• What is your eligibility for means-tested benefits? The Minimum Income Guarantee is increasing and the Pension Credit came in last year. If you receive cash from a home equity release scheme this may cancel out your eligibility for means-tested benefits or help with paying for care.Careful planning is essential as you work through these issues - but that’s the way to navigate and benefit from equity release plans safely. Finally do consider…

Family Issues

Wherever possible you should also discuss this type of arrangement with your family and anyone you live with. Property inheritance is well known for starting family feuds. If money is really tight you may be better off finding out whether you qualify for means-tested benefits or other benefits such as Attendance Allowance or Council Tax Benefit. If however, family issues are not prevalent in your own circumstances then by all means it could pay you to investigate further.

If you think home equity release could be an option and you want to find out more drop me an email or give me a call on 0800 321 3508. Age Concern also offers an easy to read fact sheet ‘Raising income or capital from your home’ free of charge from their Info Line 0800 00 99 66 open 7am-7pm, seven days a week.

Until next time…