Our Guide To Equity Release And Retirement Planning

Equity tree equity release and retirement planning
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When it comes to money, it’s often said that it’s never too soon to start planning for retirement.

But it seems plenty of people in the UK today didn’t get the memo- in 2019, an incredible 48% of Brits approaching retirement age had no financial plans at all for their life after full-time employment.

With the state pension at a little under £10,000 per year, most people require extra income to enjoy a fulfilling and comfortable retirement.

Depending on your circumstances, that could come in the form of a workplace pension or cashing in on investments you’ve made over the years.

Buying a home is commonly the single largest investment people make over the course of their lives- yet bricks-and-mortar is often overlooked as a source of cash to fund retirement.

Equity release allows you to tap into that cash without having to move house or make repayments, meaning it could potentially improve your quality of life and help you live your sunset years to the fullest.

Continue reading to get the full guide on how Equity Release can help with your retirement planning.

How Much Detail Do People In The Uk Really Go Into When Planning For Retirement?

Status of plansPercentage of respondents
I have a plan, but it’s not written down38%
I have a plan and it’s written down14%
I don’t have any plans / don’t know what I’ll do48%
Source: Aegan Retirement Readiness Survey 2019

What Is Equity Release?

Equity release is a form of borrowing available to homeowners in the UK who are at least 55 years old.

It allows you to withdraw a tax-free lump sum up to 50% of the value or your home, or take out a steady stream of income in smaller increments up to the same amount.

You don’t make any repayments on the loan until you die of move into long-term care. At the end of the loan term, the property is sold, and the money raised is used to pay off your debt. Anything left over goes into your estate.

How Does Equity Release Work?

In the UK, there are two main types of equity release. By far, the most common is a lifetime mortgage.

With a lifetime mortgage, you can borrow money up to 50% of the value of your home. Exactly how much you can borrow depends on your age, health and property’s value. Generally speaking, you will be able to borrow more as you get older or if you suffer from certain chronic health conditions.

Equity Release Drawdown Facility

It is possible to take the money as a single lump sum or a smaller instalment, which can then be topped up as you need over the years. This is known as a ‘drawdown facility’ and is useful for keeping the account balance low- which means that interest is being charged on a smaller sum of money for longer, so you’ll end up owing less overall.

On most lifetime mortgage schemes, you don’t make any payments on the loan as long as you are alive. When you die or move into long term care, your home is used to pay off the loan and any interest which has accrued.

The second type of equity release scheme is known as a home reversion plan. With home reversion, a lender buys a share in your home at a below-market price. As with a lifetime mortgage, it is possible to receive this payment as a lump sum or regular instalments.

You continue to live in your home and pay nothing on the loan as long as you live. When you die or move into long term care, the lender claims their share in your property upon its sale. 

How Do British Retirees Stack Up Against Other Nationalities For Confidence About Their Money Plans In Retirement?

CountryPercentage of people who are confident that they are financially prepared for retirement
U.S.32%
Australia22%
Germany22%
Sweden21%
The Netherlands21%
Ireland18%
U.K.14%
Italy10%
Source: SSGA, Global Retirement Reality Report – The Happiness Formula, 2018

How Can Equity Release Help My Retirement Plans?

There are many ways a cash flow problem can reveal itself as you head into retirement. Outgoings like mortgages and credit card payments which were easy to ignore when you had more disposable income may start to become a burden, or perhaps you find yourself longing to invest in new hobbies and leisure activities with the newfound free time you have.

When you take out an equity release plan, you’ll need to pay off what’s left of your mortgage- and after this, the money is yours to spend on whatever you see fit.

Common reasons people may release equity when they retire include:

Paying Off Debts

When you take out an equity release plan, you must use it to clear any mortgage debt left on your home.

However, if you have lots of different monthly debt repayments, you could consider using the funds from your equity release to clear these too and free up more of your regular income for spending on other things.

Living It Up A Little

One of the most common reasons people choose to release equity is it fund a more comfortable lifestyle.

This could range from home and garden improvements to funding travel and hobbies that you spend time on in your retirement.

Funding In-home Care

Equity release could provide you with the funds to finance in-home care, enabling you to live comfortably in your own home for longer if you have special healthcare requirements.

Gifting Inheritance

Many people entering retirement have children who are young adults. With equity release, it is possible to gift a ‘living inheritance’ to your children or loved ones at a time when they’re most likely to benefit from a financial leg-up- and you get to see them enjoy it.

Equity Release Things To Think About

Equity release is a significant financial commitment, and it is important to seek independent financial advice if you plan to use it for retirement planning.

Although it can be a fantastic tool in the right circumstances, it’s not for everyone. Could you get the money another way- by downsizing perhaps? These are the kinds of things an adviser will be able to discuss with you to make sure that you are really making the best choice to get the most out of your retirement.

Equity release plans are notoriously expensive to leave, with exit fees sometimes reaching up to a quarter of what you borrowed. For this reason, it’s important to think carefully about your needs and be sure that it’s the right option for you before you sign up.

When it comes to selecting a plan, ensure that you look for a lender who is a member of the Equity Release Council (ERC). ERC members are obliged to offer a ‘no negative equity’ guarantee.

This guarantee ensures that no matter how much interest builds up on your loan, you’ll never owe more than the value of your home at the end of the loan term- which means that your equity release plan will never eat into the rest of your estate.

Pros And Cons Of Equity Release For Retirement Planning

Equity Release ‘Pros’Equity Release ‘Cons’
Pay off other debts and financial obligations to free up your income for other forms of spendingBecause you don’t make repayments on the loan, interest quickly mounts up and eats into your estate
Improve your living standards to get the most out of your retirmentIf you change your mind it can be very expensive to leave
Gift tax-free inheritance to loved ones while you’re still alive

How Can Equity Tree Help?

Here at Equity Tree, we have partnered with some of the UK’s leading Equity Release broker companies.

They have already helped thousands of people release equity already, and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these equity release companies, click on the below and answer the questions.

Len Burgess
Len Burgess
Len Burgess is a successful digital entrepreneur and founder of LBLK Publishing which specialises in Financial content. Len has been writing professionally on financial and business topics for 5 years before starting Equity Tree.
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