FOR people either approaching retirement or there already, consideration of financial legacy and what support they can leave for the generations that follow are often front of mind.
With most people, their legacy often centres on their home. Over the years equity has been built up in property that, in turn, has (more often than not) seen an increase in value and subsequently a good return on investment that serves as an ample family inheritance.
The difficulty, however, is that, with people living longer, inheritance doesn’t usually come through until the recipients are well into their 40s and 50s, when in fact, for many people, their 20s and 30s are the decades where spare cash can have the biggest impact.
Paying school and university fees, covering rents, buying a property, getting married and having a family. These are just some of the many financial commitments in most people’s lives where parents and grandparents would like to be able to offer support but have all their money tied up in their home.
Not having enough money at these points could have a knock-on effect to how successful and comfortable you will be later in life and, as a result, people are increasingly looking to equity release products to help free up money and produce the necessary cash flow when it is needed, rather than when it is thrust upon them.
However, the difficulty is that the perception of equity release products in previous years has been difficult to shake off. Happily, though, the problems associated with unregulated equity release products sold during the 80s and 90s are now becoming a distant memory. Equity release is undergoing a change and making consumer protection a greater priority to allay some of the doubts and fears previously associated with these products. Indeed, equity release products can now be considered a solution to many of the problems that are being faced by our ageing population who want to support their family while they are still alive, and are able to see their support mean something to the younger generation.
One of the main concerns surrounding equity release in the past has been that people thought there was a chance they could lose their home. That isn’t the case – well certainly not any more. All plans carry the right to remain in your property for life and the more attractive plans allow you to keep the deeds to your property and retain 100 per cent home ownership. Interest rates are around 6 per cent and are fixed for life whilst plans are portable to other suitable properties should the policyholder decide to move.
Products are also designed with the family in mind, with some offering the ability to ring-fence a portion of the property from any effect of borrowing against it. An inheritance can be guaranteed to the estate and can be set at specific amounts such as 50 per cent. This “protected equity guarantee” has become popular as families want to leave a legacy but have more pressing current needs; allocating half of the property to each cause is seen as the best of both worlds and a fair compromise.
Whilst the more popular equity release plan is called a lifetime mortgage, don’t be fooled by the word lifetime. Advancements in these plans recognise that people are living longer and don’t want to be trapped in their home or tied to a mortgage. This year saw the introduction of a flexible plan that allows the homeowner to downsize without penalty, or pay off chunks of the plan should they come into money or find themselves with some spare cash at the end of the year. Innovation really is making equity release a product for all generations.
The interest-only option is the type of product that is becoming increasingly appealing to older family members who want to help out their children and grandchildren but don’t have any other means to offer assistance. Taking out an equity release plan should be a decision involving the whole family, and often, as part of the family decision, the children or grandchildren want to make a contribution by paying the interest payments to avoid eroding the equity in the property.
You don’t incur any charges or interest while the money is still in the reserve and you don’t have to take it all at any one time. There is less financial commitment with these plans and some reserves come with the guarantee to be there for at least 15 years.
So if you are looking for a way to provide an early inheritance at a time when it is arguably needed most, if you want to make the most of your inheritance tax benefits and, if you want to get the pleasure of seeing your gifts in action, then consider equity release. The equity release industry has grown up, shaken off its bad reputation and innovated to address a growing need from an ageing population to help deliver their legacy.
• Steve Wilkie is managing director at equity release specialist Responsible Equity Release