Life requires much analysis and dedication, particularly in financial areas. There is always planning to be done; especially for in retirement. A release of equity can be the strategic financial tool you need in conjunction with annuities, investments, inheritance tax and long term care planning. By planning out everything from the moment you retire to the eventuality of death, you can start to enjoy a worry free retirement while also having enough funds to make it a comfortable one.
What is Equity Release?
Equity release is a term often used to explain mortgages you can use in retirement. The strict definition is a secured loan to release equity from your home, where equity is the value of your home minus any outstanding mortgage. In retirement the hope is for you to have your home paid for in full allowing the equity to be the full value or current market value of your home.
Owning a home in full is a type of retirement planning because you have value that you have paid into for years. By owning a home you have an asset that can become cash at any point that you need it. If you find your investments or annuities are not going to extend income to the end of your life or your pension is not covering the monthly expenses plus holidays you wish to enjoy—you have the option of taking a release of equity.
How to maximise the equity In your home
For individuals in their retirement, with an income shortfall or capital requirement, an equity release scheme could assist once all other avenues of capital raising have been explored. Equity release schemes fall under two categories; these can be either a lifetime mortgage or a home reversion plan. Based upon the individual’s needs & dependency upon property ownership, each scheme needs to be explained in full to see whether they fulfil the needs of the retiree.
With a lifetime mortgage you have a loan that collects interest which is charged either monthly or yearly. However, usually no repayment is made on the principle amount until death or the last homeowner has moved to an assisted care facility. This means the balance escalates unless an interest only lifetime mortgage or voluntary repayment scheme is selected. They work similar to a conventional mortgage in the sense that the property remains 100% owned by the retirees.
Home reversion allows you to sell a portion of your home for funds, so you do not owe money on a home reversion mortgage, even in death. A proportion of the home is sold and is the only part of the property value that becomes owned by the home reversion provider at the end of the day. During the home reversion term, a lifetime tenancy agreement is put in place which ensures the homeowners can live there rent free for the rest of their lives.
In return for the loan or sale of property, you get a lump sum of cash to use any way you want. This is another reason equity release can be a part of retirement planning. Not only did you buy a home where you have funds to access, but you can use those funds anyway you desire. Typical examples include:
• Buy a second holiday home
• Take a once in a lifetime trip
• Pay your grandchild’s university tuition
• Help your child buy their first home
• Make home improvements
• Help with daily expenses
• Buy a car or caravan
The above list is just a few of the things you could do with the money you receive from an equity release. The funds are tax free, thus the loan or sale amount you obtain is all yours to use as you wish. This allows you to plan your holiday around funds currently gaining value in your property. Only when you are ready to use them or need the funds will you want to use a release of equity option. Homes can increase or decrease in value based on the current market and the nature of your neighbourhood. A home that continues to gain in value slowly over time ensures you have more value to unlock over time.
Equity Release helps with Inheritance Tax Planning
Equity release can be of use when it comes to inheritance. Most individuals who are property rich will eventually end up selling their home. If they have children the funds can then be divided among their beneficiaries evenly. However, this comes with a huge issue of inheritance tax. A certain amount of inheritance may be tax free to your beneficiaries, but the more inheritance you leave the more that can be taken in taxes.
By using equity release to help your children or grandchildren out when they need it you not only give them an inheritance while you are still living and can enjoy their happiness from it, you can also save them from inheritance tax. You can gift your annual allowance to a family member with exemption to inheritance tax being applied. This means your beneficiaries can avoid those inheritance taxes.
It is not fun to think about what is eventually going to happen. No one really wants to face the inevitable, but leaving your loved ones more comfortable after you are gone or simply having plans in place like a long term care facility of your choice can be of great benefit to your loved ones. Equity release can be a part of this planning process and a way to ease retirement woes if you find your annuities and investments are not enough for the retirement you want.