The problem of having to spend money is one we would all like to have. But for retired people who want to free up their hard-earned assets, working out how to reduce the estate can be a headache.
Bringing the estate below the inheritance tax (IHT) threshold of £285,000 is becoming an incentive for growing numbers of older homeowners to shed their wealth. There are 1.5 million households in the UK worth more than £285,000, but this figure is set to triple by 2020, research by the Halifax shows.
Others — the Ski (spending the kids’ inheritance) set — are simply dispensing with the concept of leaving an inheritance altogether, or choosing to offer a “living” inheritance to their offspring in the form of help with school fees or buying a house while they are still alive.
Brendan Kearns, of Norwich Union, says: “Spending the kids’ inheritance is an emotive phrase. Because people are living longer, the children will probably be retired themselves when the time comes to inherit anyway, so they are less likely to be bothered about inheriting anything.”
An increasing number of older homeowners are looking to lifetime mortgages, which enable those as young as 55 to secure a loan against their property in return for a lump-sum or regular income, to help them free up their wealth.
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The loans are gaining popularity among the Ski set as a result of the growth in house prices. However, the Financial Services Authority (FSA) has given warning that advice relating to such loans can be poor, while Which?, the consumer organisation, has criticised the high cost of some plans.
Homeowners have also been warned to avoid home reversion schemes for the time being. These are another kind of equity release plan that require you to sell part or all of your property in return for cash, but they will not be regulated until next summer.
But the tide of opinion is turning. Big names, such as Prudential, have entered the market, interest rates on the loans are falling more into line with standard mortgage rates and the deals are becoming more flexible.
Sue Anderson, of the Council of Mortgage Lenders, says: “Maybe it is time to ease up on the suspicions surrounding equity release and to chall- enge the conventional wisdom that those who have a choice should steer clear of it at all costs.”
Which? recommends that people use their savings before resorting to equity release, but some experts now agree that, in most cases, it is better to keep some savings in reserve for emergencies.
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Homeowners with other investments may want to consider cashing these in before opting for equity release, but they should be wary of hefty exit penalties. Insurance company investment bonds and some unit trusts carry penalties within the first five years, while endowment policies surrendered before maturity will have a lower value. Meanwhile, those who have with-profits investments could be tied in by high market-value adjustors (MVAs).
If the penalties are significant, equity release may be a better bet. But knowing which type of plan to choose and how much to release is tricky.
The first rule is not to attempt to spend every penny. Justin Modray, of Bestinvest, the independent financial adviser, says: “You do not know when you will die, so trying to guess how much you can spend based on your life expectancy is a dangerous gamble.”
Taking out a “drawdown” lifetime mortgage, which enables you to set a maximum you want to release and withdraw small amounts as and when you need it, is one way to avoid this problem. It also means that interest will accumulate more slowly, although this benefit may be offset by the higher rates charged on the drawdown option.
Jon King, chief executive of Ship, the trade body for equity release, says: “We are seeing more borrowers choosing this option to avoid taking out more than they need.”
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Only a handful of lenders offer drawdown deals, including Just Retirement, National Counties and Prudential, but Mr King expects that more will follow.
Any homeowners considering an equity release loan should ensure that they have a no negative equity guarantee and that their financial adviser has a CF7 qualification.
CASE STUDY: All play and no work
Irene Nuttney retired in 2000, she and her husband, Gerard, have spent four months of every year in Australia to avoid the English winter. The couple, left, spend their days swimming and playing golf and table tennis. Their annual sojourns are funded partly by a lump-sum equity release loan of £36,000, which they took out with Norwich Union in July 2004 on an interest rate of 7 per cent.
Before they took out the loan, Irene, 65, and Gerard, 72, consulted their son and daughter, who are in their thirties. The children agreed that their parents should use some of the equity in their four-bedroom property, then worth about £180,000, to enable them to enjoy their retirement.
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Irene says: “They are both doing fine. It had not even crossed their minds to object. We want to live our lives to the full and the loan has helped us to achieve this, as well as to make some home improvements and buy a new car.”
Irene, a former civil servant, and Gerard, a former self-employed fitter, have a joint income from their pensions of £1,200 a month. They have £5,000 left over from the original equity release loan and may consider taking out more equity when this dries up.