With people expecting to live longer and yet many having to survive on inadequate and dwindling pensions or investment income, it is not surprising that some people are hunting around to see at what else they can look to help them in their retirement years. And it doesn’t take long for them to realise that they are, in fact, sitting right on top of the most valuable asset they have, namely their property.
The question is does it make sense to look to this asset to release some of the wealth that they have tied up in it? And in asking whether it makes sense we have to break this question down into a number of component parts.
Is it a sensible commercial decision – properly regulated and not open to abuse and exploitation?
Even if it is, is it an expensive way of obtaining the finance required? It is certainly more expensive than traditional property mortgages.
Are there other ways of obtaining the same benefits? For example, using up any existing savings first is very likely to be a cheaper option.
What are our motives in releasing cash from our property – do they hold water in the longer term?
Equity release is a financial decision and as with all decisions it comes down to a choice between alternatives. So the question to ask when thinking “should I consider equity release?” is “rather than what?”
For the person who has a minimal pension to live on, equity release may provide a necessary cash flow to survive on and it seems an attractive option. We cannot “take it with us when we go” so why live in misery in the meantime and then let our heirs benefit for no good reason.
This then leads us to other possibilities. Perhaps, our children will support us in the interim knowing that they will obtain repayment via their inheritances at some later stage. This could very well be a far cheaper alternative but requires the necessary trust between family members and arrangements to be put into place. Certainly, it makes great sense to discuss possible notions of equity release with close relatives beforehand.
Another alternative would be to downsize – that is to sell up, move to a smaller place and release freely available cash at no further cost, other than the cost of moving. This may mean something of an emotional wrench if it has been the family home but a smaller place may be easier to look after. It may not even be necessary to move out of the area or lose contact with friends and neighbours.
Where being “asset rich but seriously cash poor” is the driving force the arguments in favour are easier to understand and justify. However, there are also a number of people taking equity release and then using the funds to spend on holidays, cars and luxuries. In itself, there is nothing wrong with this in moderation but it smacks of selling the family silver and of putting personal financial security at risk in the longer term, unless done very cautiously.
Another possible use of equity release, but of lesser application, is as means of reducing future inheritance tax liabilities by borrowing money now and giving it away to those who would have inherited later anyway. This depends on much of the wealth in the property being surplus to foreseeable requirements and the necessary trust between family members.
It should be very apparent that the above is just an initial look at the big picture regarding equity release.
Within the framework of equity release or similar types of scheme there are various different types each with advantages and disadvantages. There are also tax implications and implications for means-tested benefits. And entering into these kinds of arrangements may very well restrict, legally or financially, a person’s ability to relocate later on.
No one should enter in this arena without proper, professional financial advice.
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