Income shortages in later life

Lisa Wilson, Financial Planner

Private and workplace pensions have become increasingly common in recent years, giving future retirees some income to add to their state pension. However, many personal pensions are worth less than £10,000 and very few are large enough to provide a significant income. Current retirees may have even less pension income if they had no opportunity to build up a pension during their working lives.

The family home very often makes up the largest asset for retirees and accessing the wealth tied up in your home is an option that may well resolve an income shortage issue. Equity Release has had something of a poor reputation in the past, but the market has grown and developed over the years.  There are many well-known providers, and it is a strongly regulated sector.

It can be hugely beneficial to get advice from an independent financial adviser about Equity Release. The key to safe discussions about Equity Release is to check that the adviser you select has signed up to the Equity Release Council code of conduct. This ensures that vulnerable clients are safeguarded, and families fully understand the financial and legal implications of an Equity Release contract.

Equity Release comes in two forms: lifetime mortgages and home reversion plans. Lifetime mortgages are the most common and take the form of a loan against the value of the property which must be repaid when your home is sold or when you no longer live in it, such as when you go into long term care or if you die. Interest is payable on the loan but this can be “rolled up” to be paid alongside the original loan when it is finally repaid – or you can choose to repay the interest on a regular basis.

With a lifetime mortgage, you can arrange for what is known as a drawdown facility where you and the equity release provider agree a maximum figure that you can draw. The amount on offer will depend on factors such as your age, state of health and the value of the house. You take an initial lump sum and the remainder will be allocated to you to be withdrawn as and when you need it. The advantage of a drawdown facility is that you will only pay interest on the amount you have actually withdrawn rather than the total amount agreed under the contract.

Home reversion plans involve selling a percentage of your property. The amount released will often not reflect the market value of that proportion. You retain the right to continue living in the property until it is sold. It is the percentage sold that will be repaid, therefore if the property has increased in value, the amount paid to the lender will be higher. No repayments are normally made or required with these plans.

There is a further option to release capital tied up in your home which doesn’t involve Equity Release. Retirement Interest Only Mortgages are based on affordability but repayments are on an interest only basis. The full amount borrowed is repaid when the property is sold.

Taking out an Equity Release/Lifetime Mortgage arrangement will mean that the value of the estate you leave to your family when you die will be reduced. It may also affect your entitlement to any means tested benefits both now and in the future. Equity Release can be more expensive when compared to a normal residential mortgage. In addition, you will still be responsible for maintaining the property.

This is a Lifetime Mortgage/Home Reversion Plan. To understand the features and risks, ask for a personalised illustration. There will be a fee for Equity Release and mortgage advice. The precise amount will depend upon your circumstances, but we estimate that it will be a minimum of £1,100.

Any opinions expressed in this article are subject to change and are not advice.

Any solution described may not be suitable for everyone.

Smith & Pinching are Chartered Financial Planners. If you would like a no-cost exploratory review to discuss your financial planning with an adviser, call us today on 01603 789966 or email

Lisa Neat

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