For many in retirement, their property is the most valuable asset they own. Having benefitted from rising property prices over the last few decades you may find that your home is worth a sizeable sum. It’s often believed that property wealth is locked away, to be left as an inheritance for children and grandchildren, but Equity Release could help you access it; and it doesn’t mean reducing the support you give loved ones.
In basic terms, Equity Release is a financial arrangement that allows you to access the value of your property while you continue to live there. To use Equity Release products, you must be over the age of 55 and own your home, some products may be available if you have some mortgage remaining too. There are two types of Equity Release:
- Lifetime mortgage: A Lifetime Mortgage is where you borrow money at a fixed or capped interest rate. Typically, the interest will roll-up to be paid either on your death or when you move into long-term care. However, there are now options that allow you to repay the interest and, in some cases, the capital too.
- Home reversion: This is where the provider pays you a lump sum for a portion of your home, for example, a 40% share. When the house is sold, they’ll receive the same portion of the proceeds, whether house prices have remained the same, fallen, or increased.
Lifetime mortgages are the more popular of the two, but which option is right for you if you’re considering Equity Release will depend on your situation and goals.
A growing market
The number of retirees choosing to access the wealth that’s traditionally been locked away in property has been growing.
In the first half of 2018, a total of 38,912 households used Equity Release products, according to the Equity Release Council. This figure includes 21,490 new plans agreed, a 28% year-on-year increase. Highlighting how important the market has become for retirement income; for every £1 of savings withdrawn via flexible pension payments, 50p of housing wealth was unlocked via Equity Release.
The growing demand for Equity Release products has led to the number of products available increasing significantly. In 2016, there were just 58 to choose from, by 2018 this had more than doubled to 139. With more competition in the market, it’s made Equity Release more affordable. New customers in 2018, typically paid less than 5% interest across both drawdown and lump sum plans.
An increasing number of products to choose from has also led to greater flexibility. There are now options that allow you to pay back interest or capital, ringfence a portion of equity for inheritance purposes, and those offering a no negative equity guarantee.
Leaving an inheritance for loved ones
Among the potential concerns when considering using an Equity Release product is that it’ll eat into the inheritance left behind for loved ones. But this doesn’t always have to be the case. Using Equity Release can actually lead to effective ways to pass on wealth to beneficiaries.
- Gifting: When you think about at which points in life a lump sum can help improve financial security the most, it’s often when you’re a young adult. With some workers struggling to get on the property ladder today, while saving into a pension and raising a family, an inheritance may come too late. If this is the case with your loved ones, accessing the money locked in property could prove more beneficial than leaving a home behind.
If you do decide to gift wealth, there are some things to keep in mind. The first is the annual gifting allowance. This is currently £3,000 per year, gifts above this amount may be included in your estate for Inheritance Tax (IHT) purposes for up to seven years.
- Using other assets: Using your home to create an income for yourself, rather than using other assets, can mean you leave behind assets that are more tax-efficient in terms of IHT too. Property is considered part of your estate for IHT purposes and increasing property prices could mean you’re liable for IHT or a greater portion of your estate is.
A pension, for example, can typically be inherited outside of your estate, meaning it’s not liable for IHT. Usually, if you die before the age of 75, a pension can be inherited free from tax. After this age, it’ll usually be taxed at the Income Tax rate of the beneficiary, which may be significantly less than the rate of IHT. Using property wealth over other assets for retirement income can mean more of your wealth is passed on to loved ones rather than ending up in the taxman’s pocket.
Before making any decision regarding Equity Release, it’s important to weigh up what other options may be available to you. Equity Release can be an effective way to increase your income in retirement, but there are drawbacks to consider first and it’s not the right choice for everyone. To discuss whether Equity Release could support your retirement goals, please get in touch.