By David Elms
Chief executive of Independent Financial Adviser Promotion (IFAP)
An expert explains the risks that come with schemes that promise to unlock the value of pensioners' homes.
Financial advice expert David Elms
Millions of pensioners struggle to get by on meagre retirement savings, yet many live in homes worth far more than when they first bought them.
For people in this position, equity release schemes may seem like the ideal solution, allowing them to borrow money against the value of their home either to get a lump sum or a regular income.
However, these schemes can be complicated, with implications for tax and inheritance planning among other things, so expert advice should be sought before going down this route.
To qualify for most schemes, you need to be 60 or over, have no outstanding mortgage (or you will need to use the equity release money to pay down the existing loan), and own a property in reasonable condition.
Pros and cons
Equity release schemes can be complicated products and are a major step for people.
There are many different types of equity release scheme available and it is vital to understand the pros and cons of each.
Home reversion schemes
A reversion company buys a share of the home in the form of a lump sum and/ or regular income. Technically, you become a tenant, although you will pay little or no rent and receive a below-market value sum for the share of your property. On the sale of the property, the company takes its cut of the profits.
Home income plans
The provider gives you a mortgage on your home, which you use to buy a lifetime income, or annuity.
While mortgage interest payments are taken from this income, the original loan amount is repaid from the final sale of property.
You take out a lump sum loan against the value of your home which is repaid out of the proceeds of sale. Interest on the mortgage is paid monthly.
You borrow a lump sum and/ or monthly income and pay everything back on the sale of the property, including the cumulative interest on the loan amount.
Look out for schemes displaying the Safe Home Income Plans (SHIP) logo, an industry scheme providing certain valuable guarantees including:
- The right to stay in the home for life
Freedom to move home without penalty charges
- An upper limit on the total loan set at the value of the home
Taking out an equity release product will reduce the size of the estate passed on to family.
It is a good idea for people considering equity release to talk to their families before signing on the dotted line.
It is possible that an alternative to equity release can be found.
For example, moving to a less expensive property could release money tied up in the property without incurring interest charges.
People in receipt of means-tested state benefits should also tread carefully as a sudden injection of cash from an equity release arrangement could mean loss of benefits.
Getting independent financial and legal advice before taking out an equity release plan is recommended by both the charity Age Concern and the Financial Services Authority, the UK's chief financial watchdog.
The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.