Retirement FREEDOM Equity Release to assist Retirement Planning Autumn/Winter 2014 ATLANTIC COAST ASSOCIATES Independent Financial Advisers No place like HOME Equity Release latest 375.5m lent in 3rd quarter of 2014. Largest quarterly amount ever and a 32% year-on-year growth! (Source: Equity Release Council, October 2014) If you re either retired, or moving towards retirement, then there ll be a number of issues on your mind, as you may well enjoy the prospect of 20 years or so of retirement.* This should enable you to undertake many of the tasks you were unable to fulfil across your working life. But, and there s often a but, you may need to consider how you ll fund all of it. (Source: *Office for National Statistics ONS, National Life Tables 2010-2012, released March 2014) Healthy property prices If you have a sizeable pension pot, and other investments and savings, then you may be in an excellent position to meet ongoing costs. And with the imminent changes afoot from April 2015 in the pension marketplace, you may decide that those developments could help meet your initial needs. However, the tough economic conditions of the last seven or so years, may have put a dent in your nest egg. Or, worse still, consider the fact that a third of all employees surveyed back in 2010-2012 didn t have any private pension savings at all. A figure that rose to nearly half of all those that were self-employed! And relying on the state Are you a homeowner, aged 55+, and looking for additional funds? Then we may be able to help... pension may also not be the answer. (Sources: ONS, Statistical Bulletin, September 2014) However, there s positive news too. After the fall in house prices following the crash back in 2007, there s been sizeable annual growth in the average UK house price - up 9.4% in the year to September 2014. It is currently standing at around 188,000 (surpassing the 2007 peak, although it s a slight reduction on the previous month), and there continues to be wide price variations throughout the country. (Source: Nationwide House Prices, September 2014) Desire to release equity This growth has meant that many homeowners are sitting on a sizeable investment. An issue that s reinforced by the latest survey by LV=, an equity release provider. In its annual HIPpies home is pension report, 60% of 50+ homeowners (up from 44% in 2013) are planning, or considering, using money locked in their property to fund their retirement through options such as downsizing, equity release, or moving to a less expensive area. (Source: LV= HIPpies home is pension survey, September 2014) Many will have an emotional attachment to their home, and perhaps be keen to remain close Atlantic Coast Associates 5 Tywarnhayle Square Perranporth Cornwall TR6 0ER Tel: 01872 571868 Email: info@aca.uk.net Web: www.atlanticcoastassociates.co.uk Atlantic Coast Associates is a trading style of Fortic Financial Servives which is authorised & regulated by the Financial Conduct Authority (FCA) No. 474749. These are Lifetime Mortgages and Home Reversion Plans. To understand the features and risks, ask for a personalised illustration. Lifetime Mortgages and Home Reversion Plans are the two main types of Equity Release. An Equity Release plan will reduce the value of your estate and as a result there may be no value left to pass on. Equity Release will not be suitable for everyone and may affect your entitlement to State benefits. As Equity Release is a complex area only specially qualified advisers can give advice on these schemes. The articles are for information only and do not constitute advice. You should seek professional advice tailored to your needs and circumstances before making any decisions. to family, friends and local amenities. In this scenario, staying put may be the preferred option for them. If that s the case, then Equity Release - will enable them to remain in their home if they meet certain criteria, and are aged over 55. With year on year lending for equity release showing a sizeable 32% growth, (contd on last page) 1
Equity Release may not be the most suitable option for everyone, so it s essential to seek professional advice. Avoid confusion Equity release is a topic that s increasingly covered in the media, so it s quite likely that you would have heard at least something about it as an option to help fund your retirement years, or perhaps as a way of supporting the needs of family members. The increasing interest in raising equity from your home could be simply explained by looking at the size of the pension pot that someone may have at the end of their working life. On average, a pension fund of around 39,000 was placed in an annuity in the second quarter of this year, with half having a fund of less than 25,600. Position this against the equity that may sit in the home - an amount which could be substantially larger. (Source: Association of British Insurers, Q2 2014 statistics) Explore the options Whilst it could prove to be the solution for you, raising money from your home is not something that should be undertaken without exploring the other options on offer. And that s why it s essential that you take advice - from the financial adviser, a solicitor, possibly an accountant, and perhaps even involve family members too. Our role as a financial adviser means that we can handle much of this process, by liaising with the various parties, and being readily available to answer your questions. Not all financial advisers are qualified to advise in this area, and those that can have had to secure additional qualifications, as the industry is quite rightly mindful of ensuring it delivers the most suitable advice to the potential planholder. The following are just a few examples of where we can provide support: The issues and alternatives In many cases, there may be better options out there for you. The most obvious ones are utilising existing savings and investments, or to downsize your current home, in order to raise funds. Or perhaps you could generate extra funds by taking in a lodger. We would also need to consider if taking out an equity release plan affects any existing (or available) state benefits or local authority grants. If it does, you ll then need to weigh up the pros and cons of either route. Additionally, we may need to establish the situation with any Wills and Trusts that may already be in place. Impact upon your family Whilst attitudes seem to be changing with regard to inheritance - with some children actually being the catalyst to get their parents to consider equity release - issues do still remain. So it may make sense for us to explain the equity release process to family members too, and set out how it could result in less of an inheritance for them. The balance here is that, in most cases, the planholder does not have to pay back anything until such time the final planholder either dies or moves into long-term care - at which point the lender would recover the money owed from the sale of the property. So that s good news, as it s one less expense. And as we show below, there is also protection in place to ensure you do not pass on any debt. As equity release is not a one size fits all product, there are various options on offer. So do get in touch to find out more. Protection for you 2 The Equity Release Council (ER Council) is the industry trade body, of which its lender members represent over 90% of all equity release lending. And it has a number of rules in place to help safeguard the needs of borrowers, such as: You will never lose your home Even if the money owed on your loan eventually exceeds the value of your home, the planholder(s) will be allowed to remain in the property for life (or until the final planholder moves into long-term care), provided the property remains the main residence. You can still move elsewhere The freedom to move remains, without payment of any financial penalty. Although, you may need to repay part of a Lifetime Mortgage loan, if you move to a cheaper property. No debt for the dependants A no negative equity guarantee exists, which means that whatever the amount builds up to over the lifetime of the plan (loan + the accumulated interest), there ll be no subsequent debt for the beneficiaries of the estate.... and further regulatory protection In addition to the role played by the ER Council, the Financial Conduct Authority regulates both Lifetime Mortgages and Home Reversion plans - the two main forms of equity release.
These days there s no typical equity release customer, or typical use for the funds raised. Who opts for Equity Release? Issues such as the changing attitudes to leaving an inheritance, the desire to see family members benefit whilst you re still around, and the continuing impact of the financial crash are just some of the reasons why both the typical client and how an equity release loan is used has widened markedly over recent years. It s no longer right to simplistically view it as a product of last resort, as instead, it now plays an increasingly important role within the whole retirement planning process, such as the following... Baby boomers (and their standard mortgages) A recent development for equity release is the recognition that a number of standard mortgage loans were on an interest-only basis. And at the end of the term there may not be enough in the way of investments to settle the loan. In this instance, an equity release loan may make up the difference. Funding care needs At the other end of the spectrum are those that want to use equity release to help fund their care needs, enabling them to stay put and receive care in their own home. Meeting existing costs Of course, plenty of borrowers will want to use the loan to help cover everyday costs, or simply to enable them to undertake one or two improvements around the home. Or for those special purchases, such as a new car, or covering the cost of a holiday of a lifetime. Helping the family In some cases, the planholder may not require funds for their own needs, but are keen to help out family members now (rather than through any inheritance). This may cover, for example, university & school fees, or assistance with a deposit to get on the housing ladder. So who s the typical borrower? The typical customer releases less than a quarter of their property wealth, with the 65-74 age group accounting for 56% of loans, and the 55-64, and 75-84 age groups, take 17% and 23%, respectively. Married/co-habiting couples form the majority of those that take out plans (66%), widowed (16%), divorced/separated (10%), with singles making up the rest. And with the oldest person taking out a plan in the first half of 2014 being 102, and the youngest 55, it shows that equity release could be for everyone. (Source: Equity Release Council, Autumn 2014 Market Report, 1st half 2014) DID YOU KNOW? People in their 60s own a quarter of all property wealth in the UK, equating to 993bn!! (Source: LV= HIPpies home is pension survey, September 2014) Lifetime Mortgages A Lifetime Mortgage is similar in principle to a standard mortgage, with the main difference being that there are normally no monthly repayments to make and the loan (and accumulated interest) is redeemed when you die, or move into long-term care. The maximum you can borrow depends on the age of the youngest planholder and the value of your property. Broadly, this ranges from 20% of the value of your property if you are 60, up to around 50% if you are 90 or over. And within lifetime mortgages the most popular option is drawdown, which accounts for around 60% of all plans by value. (Source: Equity Release Council, Q3 2014 figures) Instead of opting for the full lump-sum at the outset, drawdown allows you to take what you need within certain agreed amounts and time constraints. Ok, it s not entirely have your cake and eat it - as the loan (+ interest) does have to be repaid - but it can ease your financial concerns. The effect of this approach is that it may enable you to stay within limits for means-tested benefits. It will also lessen the impact of the rolling-up of the interest that s not being paid on the loan, as there s no point paying interest on money you don t need at that moment in time. To gauge the impact of roll-up, if the rate of the lifetime mortgage loan is 6%, for example, a 50,000 loan (with the accumulated interest) would have doubled to around 100,000 after 12 years. However, do remember that the interest rate applicable when you drawdown further funds would be at the prevalent rate. Additionally, do consider products that guarantee the drawdown facility, so that you ll know it won t be an issue whenever you do come to act. Please call us to find out more. 3
Real Lives Here are a couple of examples of how Equity Release has worked for others... Improving their quality of life Some of today s retirees are concerned about how they will cope with unexpected expenses and whether they will be able to also afford some of the nicer things in life, such as holidays and home improvements. Mr & Mrs S, from Worcestershire, were pondering this problem, as they were keen to stay close to their remaining family in the UK, but also wanted to be able to visit other family members in Australia, without worrying how they d pay for each trip. They also appreciated that as time went on, expensive items would need replacing, such as carpets or the family car, and their current retirement income would not be sufficient to pay for these one-off expenses. Go for it, we don t want your money! They talked to their children about the possibility of releasing equity, and found them all to be extremely supportive. So they approached a local specialist adviser, of which Mrs S said: He wasn t loud or pushy and explained the pros and cons very clearly. I had heard some bad stories about equity release in the past, and he put our minds at rest. Quick turnaround Mr & Mrs S took out a flexible drawdown Lifetime Mortgage against their property which was at the time of application valued at 240,000. They released an initial cash lump sum of 20,000 with a fully guaranteed reserve of a further 40,000, available as and when they required. They were also very happy with how quickly they were advanced their initial loan and have already recommended the same course of action to their daughter-in-law s parents. More than just a house As the cost of utility bills continues to rise, many of today s retirees are struggling to cope with the day-to-day costs of running their home and also finding it difficult to put money aside to cope with those larger, more unexpected expenses. Mrs D, from the Midlands, found herself in this situation. She had lived in her property for almost 40 years, and staying in the place where she brought up her family was extremely important to her. As time went on, Mrs D was finding that things were beginning to need repairing or replacing. She had also seen her energy bills rise dramatically, and after a round of price increases in late 2013, she decided that enough was enough. Supportive family Mrs D had seen adverts for equity release and was introduced to a local specialist equity release adviser by her son s financial adviser. At first, her children were sceptical about equity release, having heard some negative stories in the past. But after hearing about the products available today and the consumer protections that are in place, they were happy for Mrs D to investigate further. Mrs D was extremely happy with the depth and quality of the advice she received, and the adviser ensured that she only borrowed the amount she needed now, by choosing a flexible drawdown Lifetime Mortgage. Do get in touch to see if equity release could be a suitable option for you too. Both case studies were supplied by LV=. Photographs are posed by a models. Her property was valued at 180,000 at the time of application and she released an initial cash lump sum of 16,000, with a fully guaranteed reserve of a further 32,000 to drawdown as and when she required. 4
It s not often that a Budget from the Chancellor changes the whole landscape for the at-retirement marketplace. Pension Changes However, the Budget back in March did just that - and those proposals were further clarified in October with the updated draft of the Taxation of Pensions Bill setting out the reforms, including new details. The upshot is that it will provide more choice and greater flexibility for the 320,000 or so, who retire each year with a defined contribution pension plan. Ordinarily, around three-quarters of them purchase an annuity. (Sources: HM Treasury figures, March 2014) An annuity is designed to deliver a regular income for life - and if you suffer from health or lifestyle issues, then you may even qualify for an enhanced annuity, where the annual income would be more, as you re not expected to live as long. It s then up to you to beat the odds! However, the announcement by the Chancellor means that a wider range of choices now come into the mix. From April 2015... From this date, anyone who is aged 55 or over will be able to take their entire defined contribution pension fund however they want. The first 25% will be tax-free and the remaining 75% would be taxed at the person s marginal rate. This will enable most planholders to draw down as much, or as little of their pension, at anytime. The upshot of this is that you ll need to weigh up a host of options such as: annuities. taking a sizeable lump-sum payout. investing in other retirement vehicles such as income drawdown. considering releasing equity in your property either immediately or further down the line. or quite possibly a mix of the above. How do you act? According to research by LV=, 80% of financial advisers said that their clients have considered taking their pension fund as a lump-sum. Yet in the same research, 51% said that clients were not aware of the tax implications when taking the lump-sum! (Source: LV=, July 2014) So what is the best route for you? 1. Identify how much money you need immediately after you retire. Perhaps, for example, you have to consider paying off debts, settle a mortgage loan, want to go on the holiday of a lifetime, or help out your loved ones. 2. Then assess an income stream you may need going forward, along with your attitude to risk. 3. And consider if that income (with the impact of inflation, or hiccups along the way) will always meet your needs. As part of this consideration, it may make sense to look at the impact of releasing equity in your home, either by downsizing, or through an equity release plan. The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. HM Revenue & Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. 5
With your retirement possibly covering a couple of decades, there may well be plenty of time to undertake improvements to your home. HOME Improvements 6 Improving what you have, not only makes your home more pleasant to live in, but could also increase its value. In a marketplace where property prices do generally seem to be on the up, adding extra value could work to your advantage on two counts. First, it may deliver a better sale price - should you want to downsize - enabling you to put more aside for your retirement years. Second, if you re keen to stay put, then any increase in the value of the property may mean you borrow a smaller percentage of the home s value should you opt for equity release. By doing this it may deliver benefits down the line with regard to the size of the inheritance you can then leave behind. Views of 55+ homeowners Research in June 2014 by the Equity Release Council - the industry trade body - produced some interesting findings about the home improvement views of the aged 55+ homeowners. Over two in five (42%) said that they are more likely to remain in their existing home as a result of rising property prices. And possibly buoyed by this, over a third of those surveyed are considering home improvement projects. Most popular for investment The survey also set out that the kitchen is the main focus, with over a third saying it s the area where they ve spent the most money in the past, yet for some it remains top of the list as the room that most needs repair or renovation. Possibly as a result of this, it lags well behind the living room, as the room of which they are most proud - 58% vs. 13%. Planning permission For the bigger jobs it s also worth considering that planning permission has been relaxed, so it makes sense to check with the local planning authority, an architect or builder to see what can and can t be done. And if you live in a listed building or a conservation area, then do establish your parameters in this respect too. Be energy efficient With rising fuel bills, it s worthwhile taking a look at some measures that may reduce those fuel costs. And, at the same time, establish if there are any local government grants to help you along the way. How to fund it The research also stated that the majority (84%) say they would meet the costs from their savings, with an average spend of about 10,000. If savings were not (or are no longer) an option, then over a quarter would turn to equity release. If you d like to establish if equity release may meet your needs too, do get in touch to find out more.
A concern with Equity Release is the impact of the accumulated interest - but as the chart below shows, house price growth may help to balance this. Do the MATHS Everyone s situation is different, so we d need to assess how it may work for you too. However, the diagram here will give you an idea of some of the issues that may come into play, when taking out an equity release loan. The analysis This example was produced by the Equity Release Council (ER Council) - the industry trade body - and appeared in its Autumn 2014 Market Report. It took the market averages against the typical customer, life expectancy, loan amount and interest rate charged. The upshot is an example worked against a 70 year-old receiving a 63,741 loan (against a home worth 271,293), at an interest rate of 6.39% and based around the current life expectancy (for those aged 65) of circa 83 for men and 86 for women. Additionally, the ER Council applied a fairly conservative house price growth figure of 2% per annum (it currently sits at about 9%*) - although future prices could go down, as well as up. (Source: *Nationwide House Prices, September 2014) The roll-up effect of the unpaid interest would increase the amount owing, if the policy ran for 16 years, from 63,741 to 171,724 (a growth of 107,983). Conversely, in this example, there could be a similar rise in the value of the property ( 101,134). Other issues Into this mix come other issues, such as the impact of inflation. Additionally, if you feel that prices may rise along the lines set out below; by remaining in the home 271,293 207,552 63,741 330,705 212,284 118,421 rather than downsizing to a cheaper one, any percentage growth may deliver a greater capital increase. Although you would have to balance that with the cost of any loan you may need, against the possibility of not requiring one if you downsized. A further consideration is if the borrower draws down only what s needed, rather than solely a lump-sum at the outset (as per below) - as this is one way of reducing the interest accumulation. Do talk to us to find out more. 350,946 208,343 142,603 372,427 200,703 Customer age 171,724 At start of plan After 10 years After 16 years Year of loan *Average male life expectancy past 65 (ONS) ** Average female life expectancy past 65 (ONS) House price Remaining equity (contd from page 1) 7 it is now proving to be a popular route for many.* The options There are two main types of equity release plans - you can either borrow money, which is secured against your home (Lifetime Mortgages), or sell part, or all of your home (Home Reversion schemes). The former accounts for the vast majority of all plans that are taken out. Most plans start at about 10,000 and, on average, around 67,500 is raised.* And, of course, before you proceed with an equity release plan, there are a number of issues to consider to ensure that it s the most suitable route for your needs (and perhaps those of your family too). That s why it s vital that you take professional advice. (Sources: *Equity Release Council, Q3 2014 figures) So do have a read through this issue and let us know if you would like to find out more. A minimum fee of 250.00 for arranging the mortgage payable on application, and a further 250.00 when the mortgage is offered on acceptable terms to the client. This is in addition to any commission we may receive from the lender. Additional fees may be payable for complex cases. These will always be agreed in advance. The contents of this newsletter are believed to be correct at the date of publication (October 2014). Every care is taken that the information in this newsletter is accurate at the time of going to press. However, all information and figures are subject to change and you should always make enquiries and check details and, where necessary, seek legal advice before entering into any transaction. The articles are for information only and do not constitute advice. You should seek professional advice tailored to your needs and circumstances before making any decisions. Published by BlueStone Publishing. Email: info@bluestonepublishing.co.uk Copyright: BlueStone Publishing Limited 2014. ER5