Pope’s Rule: “Blessed is he who expects nothing, for he shall never be disappointed”


Equity Release and Home Income Plans

Once you have retired, and the mortgage is paid off, you may reflect on the fact that you are house rich but cash poor.  You own a nice house but your pension is just not sufficient to bathe you in the luxury you know you deserve.

What you might need is some sort of Home Income Plan – a scheme that enables you to still live in your house, but you give up a part of its equity on death in return for an immediate cash sum, or income.  They are also called equity release plans.

As a safeguard to protect investors, the main specialist home income plan providers devised a collective initiative called “Safe Home Income Plans” (SHIP). Participating companies must observe a code of practice, which obliges them to provide fair, simple and complete presentation of their schemes. As a further safeguard, a solicitor must check your plan before you sign up.

There are two main types: -

Mortgage

You take out an interest-only mortgage and buy an annuity with the proceeds.  An annuity produces a lifetime income in exchange for capital.  The income is equal to the difference between the annuity income that you receive and the mortgage interest that you pay out each month.

On death, the annuity ceases and the house is sold to repay the original loan.  Your estate gets the rest and is distributed in accordance with your will.

Couples can take out a joint life scheme so the income continues until the last death.

The income is not very high and you have to be well into your 70’s to make it even moderately worthwhile.

 Reversion

You sell your house (or a portion of it) for cash to an institution, typically an insurance company, for a discounted figure. But the purchaser allows you to live there rent-free until the last partner dies.  The price offered is quite a bit lower than the current value of your property.  The funder has to take account of no rental income for an indeterminate period, and also reserve for the possibility that the property might not be looked after as well as before once the aging occupants freehold interest has disappeared.

Nevertheless you can get quite a reasonable sum from this arrangement, and then convert it into income using a suitable investment, but all or most of your equity is gone.  If the house subsequently falls in value, you are unaffected.

The amount of cash (which is tax free) payable depends on today’s value of the house and the applicant’s ages. The older you are, the greater the proportion of cash payable. The younger you are, the longer you will have to enjoy the proceeds.

The cash can be used for any purpose. You can invest it for income or, for certain schemes, receive the cash in stages over a period of years like a tax-free income. 

There is little risk to the homeowner in either scheme provided they are properly advised and deal with a SHIP provider.  You can also move house with these schemes.

The only people to be disadvantaged with either of these schemes is the intended beneficiaries, who clearly receive less than otherwise as some of the estate is being used to supplement parents income. Fortunately, most children take the view that they would rather see their parents comfortable than hope for a larger legacy. Many children are better off than their parents these days with more sophisticated pension arrangements and state benefits.

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