An annuity is a special investment sold by companies. It is a way of converting a lump sum, usually the pension fund you built up during your working years (but not always), into an income during retirement.
An annuity will pay you an income for the duration of your life. It cannot be used up, no matter how long you live.
There are many different types of annuity, as there also are different criteria for income drawdown. Which option is best for you depends on your individual circumstances. The one major difference is that you can always change your mind with income drawdown, you cannot with an annuity.
How to raise cash against the value of your home
Many elderly people face a
tricky financial dilemma. Their home may be worth tens or even hundreds of thousands of
pounds, yet they are forced to scrape by on a tiny income.
This dilemma is sometimes described as asset rich - cash poor. The soaring UK property
market in recent years has left the over-60s living in properties worth an estimated £500
billion. But the basic state pension is barely adequate and those who cannot top it up
from their savings and investments often find life is a constant financial struggle. A
scant reward for a lifetime spent working.
Many mistakenly assume the only possible way to solve this dilemma is to sell their home.
Understandably, few wish to take such a drastic step. But there is another solution, which
is increasingly popular. A number of financial plans known as equity release schemes allow
you to turn the equity in your property into cash in your pocket. It is your money, and it
may make sense to use it to improve the quality of your life.
Turning property into cash
Equity release schemes are
available from a number of different financial companies, some of them household names.
Different schemes work in different ways, but all work to the same basic principle. They
allow you to access the untapped wealth in your home to provide an income or lump sum to
spend as you wish-without selling your home. Schemes may even allow you the freedom to
move home afterwards if you wish.
Put simply, most equity release schemes work by allowing you to borrow money against your
home, then repay the loan from the sale proceeds of that property on death.
These schemes are not for everyone. But careful planning and independent advice can help
you decide whether you want to turn your bricks and mortar into much-needed cash.
Equity release schemes are only
appropriate for those who have passed retirement age and cannot raise money from other
sources. The older you are, the more you will benefit, as the money you raise from the
scheme will not have to last as long. Those aged 70 and above will benefit most. People
use the money raised from equity release schemes for a host of reasons. Many are
struggling on the basic state pension and simply want to boost their standard of living.
It makes little sense to struggle financially when you own a valuable asset.
Others want the cash for a specific reason, to decorate their home, buy a new car or pay
for a dream holiday. Some want to help their loved ones, perhaps by helping their children
put a deposit on a place of their own or start a business.
Of course many people still want to leave property and assets for their children and
grandchildren. The idea of passing on an inheritance still runs strong. Yet a surprising
number of elderly people are encouraged by relatives to enjoy their hard-earned money,
rather than saving it for the next generation.
Not everybody has children waiting to inherit their property. It makes much more sense for
those without close family to access the cash locked up in their home and spend it on
enjoying themselves. Finally, some need to raise cash in an emergency. They may have to
raise money to pay for the cost of home help or nursing home care if their health
deteriorates and they are unable to look after themselves. The state no longer provides
nursing and residential home care for all but the very poorest. Nursing and residential
homes can cost upwards of £20,000 a year. Equity release can help meet the bills.
There are different types of equity release plan offered by a
number of banks, insurance companies and specialist lenders. All share the same principle
of unlocking wealth in your home to spend as you wish, but they work in slightly different
ways.
Home income plans
For years home income plans were the most popular method of raising money from your
property. However, they have become less attractive since mortgage interest tax relief
(MIRAS) was scrapped in the 1999 Budget. Home income plans allow you to take out a
fixed-rate loan against the value of your property. You then use this loan to buy an
annuity, which will pay you a guaranteed income for life.
A proportion of this annuity income is used to pay off interest on the loan. The rest you
keep to spend as you wish. The capital on the loan is finally repaid when your house is
sold. The scrapping of MIRAS means that tax relief is no longer available on the interest
on the loan. A handful of home income plans are still available from a number of
providers, and you should take independent financial advice to see whether this method
best meets your needs.
Home reversion schemes
Under a home reversion scheme you sell part or even all of your property to a
specialist company and use the money raised to buy an annuity income for life.
Alternatively, some schemes may allow you to receive a lump sum payment instead, which you
can invest or spend as you wish. You may even be able to take a combination of lump sum
and annuity. As with all equity release schemes, you have the right to continue living in
your home until death. However, in this instance you will be a tenant rather than the
owner of your property. You will nevertheless still be liable for the cost of maintenance
and repairs. Plans can be transferred to subsequent properties.
You will not receive the full value of your home under the scheme, because you have the
right to live in the property for the rest of your life. The money the company will pay
will depend on how long it expects you (and your spouse or partner if you have one) to
live after signing the agreement. The older you are, the more you will receive for your
house. As women have greater life expectancy, they usually receive less than men. Expect
to get typically 40 per cent or 50 per cent of the value of your home. When the property
is sold after your death, the home reversionary company will get a share of the
proceedings, according to the share of the property you sold. If you sold all your
property, it will get the full proceeds of the sale.
Some schemes guarantee that if the plan holder dies shortly after the scheme is set up,
their estate will receive money for a minimum period, typically five years.
Home reversion schemes usually require a minimum property value of at least £40,000.
People living in parts of the country where property prices are low may face problems
meeting this requirement. They will have to consider other options such as a home income
plan.
Fixed-interest plans
The final type of equity release plan, sometimes known as interest-only mortgages,
allows you to borrow a relatively small percentage of the value of your house at a fixed
rate of interest.
Again, you can use the loan to buy an annuity to provide an income for life. You then have
the choice of using some of this annuity to repay interest on the loan each month, or
allowing the interest to roll up over the remainder of your life and repaying it from the
eventual proceeds of your house sale. If you choose the second option you will receive a
higher income as you will not have to repay any interest from your annuity. However, the
interest will roll up for as long as you live, and could eat up most of your estate at
death, particularly if you live for many years after taking out the plan. Deciding which
option best suits your circumstances can be complicated and it is best to seek advice
Is it right for you?
Your house is almost certainly the most expensive asset you own and you are likely to
have a large emotional as well as financial stake in your home. You must therefore
consider carefully any decision you make. Releasing equity from your home generally
involves handing part of its value to a third party. On some schemes, you will give up all
ownership rights, although will still be able to live there.
Points to remember
To ensure that an equity release scheme is suitable for you, consider the following
questions.
· Age. The older you are, the better you will fare. It sounds brutal, but the shorter your life expectancy the more you will receive when you use the released equity to buy an annuity. You should be at least 60 years old, preferably 70 or older.
· Mortgage. You must have cleared your mortgage and have full ownership of your home.
· Property. If you own a property in joint names, both you and your partner must agree regarding the equity release scheme. Your property must be in reasonable condition with no major structural problems, otherwise scheme providers may be reluctant to take on your property. They do not want to end up with an asset they cannot sell.
· Benefits. If you receive any means tested state benefits, these could be assessed against an equity release plan, and you could lose them. Check your entitlement carefully.
· Protection. Does your chosen scheme pay a guaranteed sum if you die shortly after taking out the plan-or set a limit on how much your estate must pay if you live for many years after?
· Alternatives. Do you have any other assets or investments that you could use to boost your income. Consider taking independent financial advice to help pinpoint and exploit any alternatives.
· Family. Would your children or other relatives be able to help you financially? You could reimburse them from the sale of your property after death. Be careful, however, as transferring assets between family members could open you to a tax bill. Again, specialist advice should be sought.
Unlocking capital in your home is a major step. There are many personal and financial
issues to consider. The range of different plans available from different companies makes
the picture seem even more confusing. Do not take such an important decision without first
seeking advice.
You should also talk to those family members close to you. Their financial interests are
also at stake. They may be required to sacrifice a large part of their inheritance if you
opt for an equity release scheme. It is best to tell them your plans, so the news does not
come as an unwelcome shock later.
Anthony Chambers Limited (registration no 3985717) is an Appointed Representative of Financial Solutions 2000 Ltd, 136 High Street, West Wickham, Kent, BR4 0LZ, which is authorised and regulated by the Financial Services Authority
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