Can equity release solve the pensions problem?

October 20, 2008 | posted by Pam Atherton in Mortgages | comments (0)

Anyone approaching retirement, whose pension pot has been invested in equities, is likely to face a disappointing income and may well turn to equity release to make up the shortfall.

Equity release is a way of unlocking money from your home in retirement. By taking out a lifetime mortgage against the equity in the property, you don’t have to pay back any interest during your lifetime. Instead the interest rolls up and is repaid  from the proceeds of the sale of your home when you die.

There are also reversion schemes which allow you to sell a set percentage of your home to a property company which allows you stay in the property  home for the rest of your life rent-free.  When you die, the property company takes its percentage share and the remainder passes to your estate.

Today, equity release plans are much safer and more flexible than they used to be, with their “no negative equity guarantees” and the flexibility to drawdown small sums of money, as and when required, so that interest is only paid on the amount withdrawn.

But despite these improvements and more equity release providers in the market, these schemes have not taken off as expected.  Latest figures show a 16 per cent drop in sales in the year to date, compared with the same period in 2007.

Which? the consumer body attributes the fall-off to these schemes being poor value for money and inflexible. Which? says that those wanting to move into sheltered accommodation or a nursing are required by some providers to pay off the mortgage early, leaving them with  little money to fund care fees.

The receipt of extra money from an  equity release scheme can also affect an elderly person’s entitlement to state benefits, such as income support and council tax rebate. 

 There have also been complaints from family members who claim they only became aware of the existence of a lifetime mortgage on their parents’ home after their death.

Which? recommends that financial advisers should always encourage older people to consider trading down first rather than doing equity release, which should only be used as a last resort.

The equity release providers’ trade body, SHIP, (which stands for Safe Home Income Plans) insists that today’s equity release plans are far better regulated and flexible than they used to be.

Some equity release plans are ‘portable,’ in that they allow an elderly person to move into sheltered accommodation without triggering repayment.  Other schemes do not charge early redemption penalties if the borrower dies or moves into long term care.

But equity release clearly comes at a cost and compound interest on a lifetime mortgage grows at a a frightening rate. At 7 per cent interest, mortgage debt  doubles roughly every 10 years, leaving little or no equity for children to inherit.

Equity release requires expert financial advice. To find an IFA visit www.unbiased.co.uk

For more on equity release, read the Defaqto guide:
http://www.defaqto.com/consumer/mortgages/equity-release.aspx

To compare conventional mortgage rates visit:
http://www.defaqto.com/consumer/mortgages.aspx

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LV= offers guarantee on drawdown plan

July 21, 2008 | posted by Pam Atherton in House prices, Mortgages, Pensions | comments (0)

With soaring inflation and pensions proving to be disappointing, an increasing number of retirees are looking to release equity from their properties as a means of bridging the gap between their actual income and their financial needs.
 
And the equity release market is becoming increasingly flexible, with more and more schemes allowing pensioners to draw down  small sums of money from their property, as and when they need to.

This is more cost effective, as the homeowner only has to be pay interest on the amount drawn down, rather than on a large lump sum which might be more than the pensioner needs at the start of their retirement.

The mutual insurer, LV=, has recently launched a Flexible  Lifetime Mortgage that allows homeowners to access funds,  as and when they need to, together with a 15-year guarantee on the maximum loan amount that can be drawn down.

This means that whatever happens to interest rates and property prices, homeowners have the peace of mind of knowing that throughout this period they can access the total amount agreed at the outset.
 
The product comes at a time when research commissioned by LV= indicates that 6.5m people over the age of 50 admit they are more concerned than ever about their income in retirement.

On average they would need £20,400 a year in retirement, but believe they would have a real income of only £17,200 a year.
 
With the LV=’s plan, homeowners between the ages of 60 and 95 can draw down a minimum amount of £10,000 and subsequent additional withdrawals of at least £2,000, up to the maximum loan agreed at outset.

The rate of interest is 6.95 per cent, or 7.1 per cent APR, fixed for the lifetime of the loan.

As an example, a couple aged 70 and 75 years respectively, living in a property valued at £325,000 could take a starting loan of £15,000.

At the same time, they could agree a maximum loan giving them access to a further £30,000 which they could draw on any time.
 
The initial application fee of £695 includes the cost of two further property re-valuations throughout the lifetime of the loan.

The scheme also comes with an all-important ‘No Negative Equity Guarantee’  which means that both the customer and their beneficiaries will never have to pay back more than the value of their home on death or permanent entry into long term care.
 
Other insurers offering similar equity release drawdown products include Just Retirement and Prudential.

David Black, banking principal at Defaqto comments: “If house prices fall significantly, equity release providers will fear potential liabilities as a result of their no negative equity gurantees. But LV=’s  guarantee that it will honour its initial drawdown offer for 15 years should give customers some reassurance.”

For more on equity release, see the Defaqto guide:

http://www.defaqto.com/consumer/mortgages/equity-release.aspxase

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Government wrestles with cost of long term care

May 13, 2008 | posted by Pam Atherton in Insurance, Mortgages | comments (0)

The Government’s announcement that it is to launch a public consultation about how long term care for the eldery is to be funded is not before time.

A Royal Commission into care for the elderly, conducted by Sir Stewart Sutherland in 1999, concluded that it should be free of charge, but this was rejected by the Government.

The issue was reviewed again more recently by ex-NatWest banker, Derek Wanless, who identified significant shortfalls in the current system and a lack of care provision in the home, which is where most elderly people prefer to stay for as long as possible.

A system of so-called ‘free’ personal care was introduced in Scotland in 2002, but this has run into difficulties, too. The total cost of nursing care in Scotland in the first four years amounted to £1.8bn and a shortfall in funding of £63m has been identifed for 2005-06 alone.

So what does the latest public consultation need to consider? Firstly, cost and who should pay for it, and secondly, the need for clear definitions of who will be eligible for what.

Currently ‘personal care’ covers a wide range of services provided by local authorites and the independent sector in the provision of care services to elderly people in their homes or in care homes.

It includes cover provided by day centres,  in  sheltered accommodation and ‘home help’ provided to elderly people to assist them with ‘activities of daily living’ such as washing, dressing, feeding and toileting.

In England, personal care services are largely paid for by the end user because it is a means-tested benefit. Free care is only available automatically to people with assets  (including the value of their property), of less than £22,250.

Otherwise, costs have to be paid for by the elderly person or their family, unless the elderly person’s assets are near the threshold or their need for personal care is due to a specific medical condition.

In the latter case, care is defined as ‘nursing care’ and should be provided free-of-charge by the NHS.

But this does not always happen. There have been numerous complaints that access to free personal care has become a post code lottery, with arbitrary and inconsistent decisions being made by different health authorities.

For instance, elderly people with the same condition (such as Alzheimer’s disease) can receive free care under some NHS authorities, but not others, due to different interpretations of the benefit rules.

The other principal problem is funding. A nursing home can cost anything between £300-£1,000 a week, depending on the level of nursing required, geopgraphical area and the standard of the accommodation.

So a £500 week care home would eat up £26,000 of an elderly person’s assets in a year, so that their home might have to sold after 12 months in care.

Few insurers provide immediate needs annuities (Partnership Assurance, Axa PPP and LV=)  and only Partnership Assurance offers a risk-based lump sum saving scheme for long term care.

Could drawdown equity release products be part of the answer? 
 

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