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Equity Release

Equity release – the basics

Equity release is a loan secured against your home. Unlike conventional mortgages, there are typically no requirements to make monthly repayments and equity release plans do not have a fixed term.

The most popular type of equity release is a lifetime mortgage. You will retain full ownership of your property and the interest on the loan can be paid each month or rolled up. The outstanding loan and any rolled up interest is repaid after your death or if you sell the property and move in to long term care. If you move to another home, you may be abe to transfer the plan.

There is normally a drawdown option where cash can be taken in a series of lump sums rather than all at once with a lifetime mortgage.

Although it may be tempting to get some extra cash, it is important that you don’t take equity release too early in your retirement. The average age for equity release is 67 and anyone taking equity release in early retirement must watch out for the effect of compound interest.

This is a specialised area of financial services, and expert financial advice should always be sought before taking out equity release.

When should equity release be considered?

There are a number of ways equity release can be used in retirement planning including:

  • Providing additional cash or income for clients who are ‘cash poor but asset rich’
  • Gifting money to children or grandchildren
  • High net worth clients who want to reduce their IHT liabilities

Cash poor but asset rich

It is not uncommon to find elderly clients with a substantial property asset, modest pension provision but low levels of personal savings.

Whilst they may enjoy a comfortable lifestyle, they may need cash to fund additional discretionary or unexpected expenditure, such as overseas travel to visit family and friends, home improvements or even care costs.

In these situations there is a strong case for using equity release to provide the required cash and income.

Gifting money to children

Most parents and grandparents want to help their children and grandchildren get on in life, whether it is help funding education costs or getting on to the housing ladder. However, most people don’t have the readily available cash and do not want to give away the money they have saved for their own retirement.

In the right circumstances, equity release can be used to help the younger generation get on in life.

Reducing IHT liabilities

IHT is often described as a ‘voluntary tax’ because there are a number of simple ways to reduce it.

Those with complex financial situations who need sophisticated IHT planning advice, should consult a specialist financial / tax adviser who will explain the various ways of reducing IHT. This might involve setting up a trust, using life assurance policies or investing in assets which do not attract IHT.

However, those with relatively straightforward financial circumstances, for example, where their main asset is the family home, equity release can provide an easy to understand and uncomplicated way to reduce future IHT liabilities.

An equity release plan reduces the value of the estate which in turn could reduce IHT liabilities, for example, if the value of the joint estate is over £1 million.

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