Self-administered equity reliefPosted on: 13 June 2014 by Gareth Hargreaves
Equity release has a poor image but if you have made money on your property and need a monthly income it can be a life-changing move.
One of the favourite sound bites from the recent pension reforms in the Budget was Pensions Minister Stephen Webb deciding a “Lamborghini” might be the vehicle pensioners choose to buy with their new-found financial freedom in old age.
The scaremongers piled in, predicting pension Armageddon – but the consensus seems to be that those who’ve spent a lifetime being financially prudent are unlikely to lose the plot in the home straight!
The pension pot is only one piece of the jigsaw for the financially savvy – to be used and exploited for the benefit of the present and the past, alongside specialist advice on property, investments, pensions and insurance.
That landscape and environment is changing fast. Everyone is living longer, final salary pensions schemes and interest-only mortgages are almost extinct. The numbers of self-employed is also increasing (mainly because of the economic downturn and the advantages of new technology) and the responsibility of parents is extending beyond middle age.
Some see this unfamiliar territory as frightening and intimidating; others, especially those who have always prepared and planned for the future, view a brave new world, full of legitimate opportunities which reward investment and commitment.
Prime Minister David Cameron’s Coalition reacted to the growing pension crisis with those reforms laid out in the Budget. Everyone – insurance and annuity companies, HMRC, pension providers, Independent Financial Advisers and the customers themselves – are all waiting for the small print. There might be some devil in the detail of the regulations, but it will be hard to back-pedal now from the Chancellor’s stated intentions.
George Osborne “promised” that from April 2015 people would be able to access their entire pensions and not be required to buy an annuity, which increasingly had become a poor deal.
Pensions appear to have faded into the wings with the property “crisis” or “bubble” now taking centre stage, with fears of a return to the crazy lending that helped create the financial crisis of 2008. Prices may be rising, but mainly because of a lack of supply; there is little sign of irresponsible lending.
People are desperate to get on the housing ladder because property has shown itself to be a pretty good investment over the past 40 years. There have been ups and downs, but, if you have been able to stay in the game, you have been onto a winner – as well as having somewhere to live.
The changing landscape means parents are moving away from using their will as the main means of transferring assets to their children. The 40% Inheritance Tax rate has something to do with that; the more relevant factor is the pressing need the off-springs have for assistance in becoming home owners.
“Downsizing” is the answer – and the answer to many questions.
It allows the pensioner to cash in on the property “bubble”, to move to a house that is more suited to the demands of old age, to release equity that can be used for themselves, their children and their children’s children. To reduce on-going household costs, to prepare for the final years in a location that will provide better local services, and perhaps, to compensate for an annuity that is not providing the creature comforts hoped for.
There also might be the benefit of avoiding the mansion tax, which looks certain to appear in some form – probably in Council Tax guise – after next year’s General Election.
The figures suggest “downsizing” will have a beneficial impact far beyond the individual. According to estate agents Savills, the over-65s have almost £1 trillion of equity in residential property and the government would be grateful if some of that found its way back into circulation.
“Downsizing” would also free up larger houses and flats; properties that were bought for growing families are now occupied by just a couple, or even less. The recession has meant that the past six years has been a period for staying put and waiting for better times.
There are genuine signs those better times are approaching; in many areas, as far as the property market is concerned, they arrived a while ago.
Interestingly, equity release schemes, which have not always found favour other than as a last resort, are becoming more attractive in terms of cost. Equity release allows homeowners to borrow against the property (normally up to one third) and take a lump sum or a monthly income.
There are no repayments; the interest is rolled up and added to the debt – then repaid when the property is sold. It does not take long for rates of around 7% and a stagnant property market for that debt to take the bulk of the value of that house.
As with annuities, the older generation has voted with their feet regarding equity release – unless they are left with little choice and no access to money elsewhere.
As ever, expert advice is essential when making these potentially life-changing decisions.
Twice as many older people downsize in the USA (around 20%) than do in the UK; here, the cost of such a move is often given as the reason for doing nothing. House price increases should certainly make that much less of a stumbling block in the future.
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