Unlocking Your WealthPosted on: 26 March 2008 by Gareth Hargreaves
Low annuity rates, equity bear markets, failing company pension schemes and a straightforward lack of provision for retirement has seen the use of equity release in retirement planning increase significantly in recent years.
Equity release allows you to get significant lump sums by either selling a share in your home or taking out a specialised mortgage. The lump sum can then be used to supplement income. If an annuity is purchased, a guaranteed income will be secured.
Times have changed
Equity release got a bad name in the 1980s when some people lost their homes or experienced negative equity. But since then the market has moved on greatly and schemes approved by the provider's association Safe Home Income Plans (SHIP) come with plenty of guarantees.
There are two types of equity release plan: home reversion schemes and lifetime mortgages, or cash release schemes as they are sometimes known.
With a home reversion scheme you sell your home, or a percentage of your home, to a plan provider. You can remain in your house rent-free until the last borrower, in the case of a couple, dies or is transferred into long-term care. When the property is sold the provider reclaims their percentage with the rest going to the heirs of your estate.
A regular income
With a lifetime mortgage, on the other hand, you take out a mortgage on your property and may use the money as you wish. As the interest is accumulated over the life of the mortgage there are no monthly repayments to be made. SHIP-approved plans come with a 'no negative equity' guarantee so you will never have to pay back more than the value of your home. This is very important because, with this type of plan, the longer you live the larger the amount of interest that will be due.
Other guarantees with lenders who are members of SHIP include the right to move house and transfer the equity release plan to the new property.
Using equity release can give you more flexibility and instead of purchasing an annuity, the lump sum can be used to purchase alternative investments.
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