As with all financial situations, everything is personal making equity release a potentially good idea for some people. To explore the possibilities of whether it’s right for you, you need to think in the long-term and much farther than a five, ten or even 15-year financial plan.
There are a number of positives for releasing equity from your home early, and there are also drawbacks that shouldn’t be overlooked. Provided you work with an experienced equity release adviser such as Jubilee, you’ll get the advice and disadvantages explained, so you know how equity release will affect your personal and unique financial planning for decades into an active equity release loan.
Some possible options where equity release can be a good idea include:
- To pay off existing debts so you can stop making monthly payments
- To take advantage of Inheritance Tax Planning to lower your tax bill
- To supplement underperforming pension plans in retirement
- To help your children and grandchildren with money now
- And to enjoy your retirement as you imagined you’d planned for – even the most detailed plans don’t always come together.
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Equity Release Options Explored in Detail
- Using equity release to pay off your debts to avoid monthly payments
Is that really a good plan?
Rising debts can cripple your retirement finances, especially if your pension funds aren’t performing as expected, which is the case many people nearing retirement find. The only options to finance retirement appear to be continuing to make monthly payments to car finance agreements, credit cards and usually the biggest of all, the mortgage payments.
Equity release can cut your monthly outgoings significantly, letting whatever income you have for retirement go further. You’d be able to release the equity you own in your home, repay what’s left of your mortgage, pay your car finance and many other debts and often have surplus cash to fund your golden years.
For equity release to be considered viable for debt consolidation, it’s best to calculate what debts you are paying down and work out what the interest rates would be if you were to continue making monthly payments.
Remember that equity release is a lifetime mortgage, so existing debts rolling into equity release loans will have a lower interest rate, but the interest accumulates for life.
Paying down debts in the traditional way takes longer, but it does eventually clear. Lifetime mortgages don’t. They only expire when you do.
Naturally, the older you are when your plan starts, the less interest will build up. Some companies arrange equity release for those over 70. If your loan runs for 15-years (i.e. plan begins when you’re 70, and you live ‘til the age of 85), that’s 15-years interest that’ll have accrued.
There are safeguards you can build into plans such as using flexible borrowing methods that let you pay some of the interest so that your plan doesn’t wipe out your estate’s value. You can set your equity release plans up to repay some interest without penalties and also with a portion of your estate ring-fenced, so your relatives have something left.
A number of firms provide pre-approved funds up to a certain limit, and you don’t have to take all your money in one go. You can take a partial amount at the start of your plan, perhaps £50,000, leaving the rest of your money with the company to release when you want or need it. The money pre-approved for release does not accrue interest. Interest is only applied from the date the money is with you to spend as you like.
For paying down debts that are making a bigger dent in your monthly budget than you’d like, you can take a smaller amount than your home’s worth, pay the debts, leave the rest on account for when you need it and that way, you may not pay as high an amount in the longer term. Of course, it depends on the total of your debts you want to pay off. The one you always need to repay in full is your mortgage.
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- Can I Lower the Inheritance Tax of My Estate using Equity Release?
Some advisers will use the IHT scenarios to sell equity release plans because the higher your estate value is, the higher your savings will be.
It’s highly complicated, though and not something to jump into without specialist advice. And ongoing advice from your financial adviser going forward because equity release can be effective for IHT planning, but it needs consistent record-keeping of all your financial decisions that would affect the amount owed on IHT from your estate.
How Equity Release Could Lower an IHT Bill
A word of caution first here. You cannot and should not take out an equity release product for the sole purpose of lowering your inheritance tax bill.
This only works as a side effect of selling your home through equity release that lets you keep the right to live there for the rest of your life as the owner but without paying any monthly mortgage premiums.
As soon as your equity release plan begins, you’ll no longer be the owner of the property. What you can do on some plans is ring-fence a pre-set amount to leave an inheritance to your kids and grandkids or anyone else you want to include as beneficiaries of your estate.
As equity release is selling the ownership of your home, the financial provider to release the equity becomes the owner. When you pass (or you and your spouse in the case of joint ownership properties) the equity release plan provider will sell your home and take the repayments owed to them from the monthly interest charges that will have accrued each month up until you’ve passed.
Whatever portion of the equity release you’ve ring-fenced for your heirs, is subject to Inheritance Tax but there’s a very good chance that it’ll be below the IHT threshold because a large chunk of your properties value will be used to repay the loan.
Keep in mind that the monthly interest continues to accrue for life. If you live for another 30 to 40 years, chances are, there’ll be a good amount of your estate wiped out completely. Setting aside something such as 20% is something worth serious consideration because 20% of your property value is much better than your loved ones getting 100% of nothing.
As part of IHT planning, it’s best to speak with a financial adviser because there are exemptions you can use provided you live longer than 7-years. Much of the exemptions focus on gifting assets or liquid wealth among direct family members (children and grandchildren) that’s longer than 7-years before you pass, as those are exempt from IHT. But, there are annual limitations on how much you can gift without taxes applying.
Each year, everyone can gift up to £3,000 per tax year. This is an Exempt Lifetime Gift. Another exemption is when your children are getting married. You can gift up to £5,000 (once) as a wedding gift for your child, or £2,500 for a grandchild or great-grandchild. Be warned though, if the wedding is called off, so is the exemption.
In the case of a child getting married, which is a significant expense for parents, you can combine your annual £3,000 with the £5,000 one-time wedding gift to give your child £8,000 as a gift that doesn’t count towards IHT, provided you live beyond 7-years after giving them the money. If you pass within 7-years, it can look like you were off-loading cash deliberately to avoid taxes, so there is a 7-year clause to prevent gift exemptions from being abused.
Naturally, to afford the luxury of gifting your loved ones cash while you’re alive, the cash needs to be accessible. Equity release will get you the cash from your home to increase your savings, letting you distribute your wealth tax-efficiently, but it is only an advance on inheritance. The major drawback is once you’re gone, your estate will have decreased in value.
Also, if you are using equity release for IHT planning, you will need to keep records of all the exemptions you use. When you pass, the executor of your estate will need your financial records to make sure they are paying the right amount of inheritance tax, or none at all, whichever the case may be.
- Can you just gift your home to your child to avoid the tax implications?
There is an exemption (although complicated) that lets parents give their home to their child exempt from tax. But you need to move out and not have plans to move back in if you need long-term care assistance. What parents need to be careful with when gifting a large asset like your home is that it cannot be considered as what’s called a “Gift with Reservation of Benefit”. (GROB for short). For the benefit to count as a gift, it needs to have direct benefit without any reservations, meaning you can’t keep it as a safety net.
It is an option for those whose homes have sentimental value, letting you keep it in the family but you won’t be able to live there and if you do, it’d likely need to be under a rental situation where your child becomes your landlord, responsible for paying tax on the rent you pay them. You’d essentially be shifting the type of tax payable.
When you take out equity release, the property is no longer yours to gift to your child; therefore, equity release is unsuited to those with an emotional investment in their property. Once you take out an equity release loan, the home will go on sale once you pass. If your child or relatives want to keep it in the family, they’d need to buy the home at market value and possibly compete with other buyers interested in buying the property on the open market. There’s no option with any equity release provider to guarantee anyone has a right to buy the property back at market value. It’s sold on the open market at the market rates at the time of sale.
For that reason, for those whose homes have an emotional value, equity release will be a bad idea because your children will not be guaranteed your home as part of your estate, even if they’re willing to buy it back.
For equity release to be financially feasible for your children now, some of the cash released can be gifted to your children using your annual exemptions to perhaps put a deposit on a home of their own, then use your annual exemptions to contribute towards their mortgage payments.
The annual exemptions are per person, so a mother and father can each gift up to £3,000 per year to a child.
The ONS findings for the financial year of 2016/17 showed the average mortgage payments for a family was £671.23 per month. Over the year, that’s just over £8,000 per annum. Two parents, each contributing the maximum gift allowance of £3,000 could contribute as much as 75% to their child’s mortgage each year.
Where this would be a good idea wouldn’t just be for the generous gesture, but instead helping your child out if they found themselves in financial difficulty. Such as the unexpected death of their partner, terminal illness diagnosis or any situation that prevented one or both earners losing their income. Instead of being forced to sell their own family home, you could use your equity release combined with the annual gift exemptions to see your child through a rough financial time and keep the home they’ve already invested heavily into.
How Equity Release Can Affect Means-Tested Benefits
Means-tested benefits in retirement include pension credits and assistance with council tax/housing benefit. By releasing cash from your property through equity release, it can affect your entitlement to means-tested benefits.
For council tax reductions or the full benefit, your savings need to be under £10,000. The upper limit is £16,000. Between £10,000 and £16,000 in savings entitles you to a partial benefit. Above the upper limit threshold, you lose entitlement to council tax reductions.
Pension credits shouldn’t be ruled out of your retirement planning either as it’s about more than the money you get each week if you are entitled. When you meet the eligibility criteria, there are additional savings that can add up to thousands of pounds each year.
To qualify for the guaranteed element of pension credit, a single pensioner needs to have a weekly income that’s under £167.25 per week, or £255.25 for retired couples.
Weekly incomes under that can use pension credits to top their weekly income up to those amounts, but you can’t have savings over £10,000, or you won’t be entitled to the guaranteed element of pension credits.
With savings over £10,000, the Pension Service assume you earn £1 for every £500 you have in savings above the £10,000. Congrats if you manage to get those returns.
In terms of retirement income, on the surface, pension credits are not going to add a huge amount. But the perks are beyond the money. You also get access to free dental care, council tax reductions, cold weather payments (around £25 weekly) up to £215 in vouchers to put towards the cost of glasses or contact lenses, entitlement to the Warm Home Discount scheme paying £140 a year to your electricity or gas bill, a free TV license when you reach 75, and you can get free insulation to keep your home warm with additional grants available for boiler care that could be worth thousands alone.
When considering equity release to increase cash flow, always consider what you’ll sacrifice by increasing your accessible savings beyond the £10,000 threshold. Once above that, you lose the entitlement to a raft of extras you’d get with pension credits.
The Best Scenario for Equity Release Plans
For the asset rich and cash poor retirees – equity release can be a no-brainer. By asset rich, we mean you have a wealth portfolio that consists of more than your family property.
Pension pots only go so far. If you have a pension pot, own your home, have used your annual ISA allowance for years, built a wealth portfolio with distributed risk between annuities, shares, investments and bonds, then your property will only make up a small fraction of your overall asset wealth.
Savings and investments can be left in place to continue performing to build towards your estate value. Chances are if you’ve owned your home for decades, there’s likely an increase in the property value. That’s the asset wealth you can cash in and turn it into liquid wealth to fund your retirement, knowing you have other assets included in your will to leave your loved ones.
If the only asset you have is your home, then equity release may be a bad idea as your loved ones wouldn’t have as much from your estate when you’re no longer around to support them financially.
To know for sure if equity release is a good idea for your unique situation, get advice from an equity release specialist who is registered and regulated by the FCA and a full-fledged member of the Equity Release Council. It’s the safest way to ensure the advice you get is impartial. To go further, speak with someone independent as they can assess your suitability to equity release plans across the whole of market, rather than being restricted to working with pre-selected partners only, which will limit the plans you’re advised on.