Equity release plans – what to consider?
If you are approaching or already in retirement and have found that your pensions, savings or shares are not worth as much as you had anticipated, then you may have considered whether an equity release plan could help.
The main advantages to an equity release plan are an increased cash flow whilst you remain in your home and any money received will be free of income tax. In the current economic climate, such plans have seen a noticeable growth in popularity.
There are a variety of plans available, where there is some form of charge placed over your property and in return you receive from the equity release company either income, a lump sum or a combination of both, depending upon your circumstances and requirements.
If you do not have any beneficiaries then this may be an excellent option, releasing cash from your home, which in most instances will be a person’s major asset.
Even if you do have beneficiaries, there may be some inheritance tax benefits of taking out an equity release plan. For example, if you have a large estate the value of this could be reduced and accordingly it will shrink your inheritance tax liability on death. However, you will need to consider the implications for your family if your estate is reduced substantially.
Deciding what percentage of your home’s value to release is a key decision. If you want to ensure that your family inherit a suitable sum from your estate, look for schemes which can guarantee a proportion of your estate will remain untouched.
A key issue to consider is that an equity release scheme can only be drawn up in the names of those who own the property. This means that if you live with someone who does not own the property with you, they may be vulnerable if you die, when the property would revert to the equity release company. For example, this might be a son or daughter or grandchild who could not be added to the scheme if they were under the required age limit.
Likewise, for couples living in a property who are looking at equity release, careful consideration must be given where the property is not in joint names. We can assist in putting the property in your joint names if you wish.
Equity release schemes involve a number of costs, which you need to take into account in addition to the interest rate. These include fees involved in setting up such a scheme e.g. brokers fees, arrangement fees, solicitors fees and disbursements and any administrative fees payable both now and in the future. In addition, if you decide to pay off the scheme early, or change any of its conditions, you will probably be liable for further fees.
Remember that the usual outgoings on your home such as utility bills and council tax will still be payable. Youmust continue to ensure that buildings insurance is kept in force, as this will no doubt be a condition of the scheme and in some instances only approved insurers can be used.
You will have a duty to keep your property in a reasonable state of repair, so it is not devalued. This could be problematic if your health declines or if the property depreciates and is worth less than the loan and interest due. However, there are some equity release policies with a ‘no negative equity’ guarantee.
If you have taken out an equity release scheme or are planning to do so, we recommend that you update your will and we can help with this.
When considering any equity release plan independent legal advice should be sought at the earliest opportunity, so that your proposals can be discussed and the best advice given to assist your needs.
If you wish to discuss matters raised in this article please contact Rajan Berry or Natalie Fothergill.