The Salary Calculator

The ins and outs of Equity Release

by Madaline Dunn

According to research, the number of new and returning equity release customers reached 93,421 in 2022, meaning more people are choosing these products and it’s likely that the cost of living crisis has something to do with it.

Legal & General, for example, which is one of the UK’s largest equity release lenders, outlined that 25% of those taking out loans are now doing so to supplement their income; this is reportedly up from 19% in the previous year.

You might be wondering whether equity release is a good option for you, or you may be new to the term and keen to learn more; either way, at The Salary Calculator, you’re in good hands. This week, we’ll explore the following:

• What equity release is and the different types
• The advantages of equity release
• The drawbacks
• The Equity Release Council’s new guidance

What is Equity Release?

Equity release products enable you to access the equity (money) tied up in your home as you get older. There are two main types of equity release, the first being Lifetime Mortgages, which allow you to take out either a lump sum or instalments of cash against the value of your home, while retaining ownership. Typically, you can borrow between 20% and 50% of your home’s valuation, and the amount you can take out, will depend on your age.

You can begin to access these plans from age 55. Interest is applied on an increasing sum, meaning that your interest is added to your debt on a continual basis. That being said, you’ll never pay more than the value of your home. The loan and any interest will be paid off by selling the property when you either pass away or move into long-term care. Statistics show that these kinds of equity-release products make up around 95% of the market.

Home reversions, on the other hand, are offered to those aged 60 and up, and with this product, you don’t retain ownership of your home, or at most, only part of it (between 25% – 100% is sold). While you give up full ownership of your house with home reversions, you maintain the legal right to remain in your home until you die or move into long-term care. Likewise, your lender will pay you less than the market value of your home.

To find out which equity release product best suits your needs, it’s worth speaking with an equity release advisor; if you choose to take one out, you’ll have to do it through a financial adviser, too. The former will take into consideration a number of different factors in their recommendation to you, including:

• The value of your property
• Your current and future financial and lifestyle requirements
• Your age

The advantages of equity release

When it comes to assessing the advantages of equity release, it’s worth noting that in both versions of equity release, any of the cash that you receive is tax-free, and you won’t find yourself in negative equity because, when your property gets sold, additional debt not covered by the property sale will be written off. Likewise, you can take money out of your home when you need it, and aren’t required to make monthly repayments.

Further, you also have the right to move home, and take your mortgage with you, so you’re not bound to one property.

Similarly, with both, you can opt to pay back your loan or buy back your home, however, it’s worth bearing in mind that this can cost you quite a bit. The same goes for paying your loan off early, it is doable, but you may be hit with early repayment charges.

The drawbacks

While there are undoubtedly some attractive qualities to equity release, there are some downsides, too, which are worth taking into consideration. With lifetime loans, for example, you could end up in a position where you owe more than you borrowed when the home comes to being sold. Although, there are ways out of this, and you can decide to pay off the interest each year as you go. To make things more bitesize, you can also opt for a series of smaller lifetime mortgages.

When it comes to equity release, you may also impact your entitlement to mean-tested state benefits, this includes Pension credit, savings credit and council tax benefit, so be wary. You will also encounter lender fees, solicitor fees, and equity release advisor fees; expect to spend between £2,000 and £3,000.

More generally, opting for equity release also means that you might leave behind less inheritance for your family when you pass on.

With home reversion, on the other hand, you can only receive a maximum of 60% of the market value of your home, and in more cases than not, it will actually be much less than this.

Equity Release Council releases new guidance

When thinking about pursuing equity release, you can be safe in the knowledge that all firms that either advise on or sell equity release are regulated by the Financial Conduct Authority (FCA). That being said, it’s wise to make sure you go with a company that is a member of the Equity Release Council. Members follow a voluntary code of conduct, which ensures certain product standards.

There have been recent updates in this area, too. The council recently released its consumer guide, which advises potential customers on fees, enabling them to understand what they mean and compare fees and charges across different equity release deals. The council is also recommending that equity release advisors adopt the language in the guide to simplify things for customers and make it more accessible. The guide can be found here.

Speaking about this, Jim Boyd, CEO of the ERC, explained that customers are often presented with unfamiliar terms and definitions, and to complicate matters further, different firms often use slightly different language, which can complicate things for customers.

He outlined: “The council’s guidance describes all the fees and charges that could be relevant to an equity release application, depending on its complexity. Our aim is to establish a set of standard definitions to help consumers to understand their options as they explore the equity release process with a regulated adviser.”

He added that the council understands that adopting changes takes time, but that the arrival of the “Consumer Duty” is a chance for the industry to take stock and “move towards a standardised approach.” “We hope all firms will take this guidance on board when they next revisit their approach, so it becomes the standard across the equity release market,” he said.

Tags: Consumer goods, Equity release, home, Loans

Later life money management

by Madaline Dunn

According to research, nearly one in five people in the UK are now over State Pension age (65+), and with advances in medicine and technology meaning people live longer than ever, the average person is likely to spend a quarter of their lifetime retired.

There will no doubt be different stages you go through during this later period of life, too, with each phase requiring different kinds of support. So, it’s a good idea to get your finances in order, compile a personalised checklist and get a good idea of later life money management.

Later life planning can feel a little daunting; after all, there’s a lot to take into consideration and organise. That being said, research shows that planning for later life, including later-life money management planning, is correlated with a higher level of well-being further down the line. Your later life plans can include everything from whether or not you choose to downsize and put aside money for later life care to organising your will.

In this week’s article at The Salary Calculator, we’ll guide you through the following:

• Reviewing your pension choices
• What equity release is
• Different benefits you might be entitled to
• Navigating long-term care finances
• Wills and probate
• How to watch out for scams

Review your pension choices

It’s key that you know the state of your pension; after all, when you reach later life, you’ll likely have different pension arrangements from different jobs you’ve had over the years, so it can be a good idea to consolidate them. You can use the Pension Tracing Service to track them all down. It’s advisable to speak to a financial advisor to check whether this is the best option for you.

Likewise, it’s also a good idea to see where you are with regard to your state pension. To do this, and get an estimate, simply use the GOV.UK State Pension calculator.

Look into equity release

Equity release is a way to access the value of your home (the “equity”) so that you can spend it during your retirement without having to sell your home. exists in two forms: a lifetime mortgage and a home reversion plan – one of the key differences between the two is that with the former, you still retain ownership of your home. Further, the former allows you to borrow a portion of the value of your home, and interest does apply to this. The loan is repaid either when you pass away, move into long-term care, or sell your home. There are two versions of this: an interest roll-up mortgage and an interest-paying mortgage.

The latter enables you to sell either part or all of your house, for a cash lump sum, a regular income, or both, which will be considerably less than you would have obtained if you were to sell your property. Typically you will receive between 30% and 60% of the market value of your home, as you are allowed to continue living there, and the owner cannot sell the property until you are permanently vacated, in whichever capacity that is.

See what benefits you’re entitled to

It’s a wise idea to make sure that you’re receiving all the benefits you’re entitled to as you get older; after all, everyone can do with a little extra support these days. In fact, billions in benefits go unclaimed each year.

Some benefits that you might be entitled to in your later years include:

• The Winter Fuel Payment
• Housing Benefit
• TV Licence Concessions
• Council Tax support and
• Travel Concessions.

Long-term care

Looking ahead to later life, it’s important to prepare for every eventuality, even if it may feel rather morbid, it’ll more effectively safeguard your future. This is especially true considering that life expectancy these days is much longer, with male and female babies born in 2018 predicted to live 79.9 years old and 83.4 years old, respectively. Likewise, the likelihood of becoming disabled or experiencing multiple chronic and complex health conditions increases with age. Comparatively, the time people spend in poor health has increased, and the so-called ‘healthy life expectancy’ is much shorter: 63.3 years for males and 63.9 for females.

Subsequently, it’s important to plan ahead as you will likely have to fund this later-life long-term care yourself. This might be achieved through your pension/s, any investment money you have, or through equity release. That said, you may qualify for help with this via your local authority.

Arranging your will

As you enter the later stages of life, it’s likely that you’ll be thinking more about what will happen once you’ve passed on. A part of this might be thinking about your legacy and, if you have money or keepsakes, who you might pass this on to. If you haven’t arranged this yet, it could be worth looking into to ensure a smoother process later on and guarantee that those who you wish to inherit this receive it. If you already have a will, it’s worth reviewing and updating it as required.

Here, it’s also worth checking whether or not inheritance tax will apply. For more information about that, head over here. By planning ahead, and taking the above into consideration, you can also look into lowering your inheritance tax by parting ways with some of your money, for example, through:

• Charitable giving,
• Lifetime gifts,
• Setting up a trust.

You may want to look into setting up Power of Attorney, too. This gives another individual/s legal authority to make decisions on your behalf, if, for example, you spend time in hospital, or you no longer have the mental capacity to make your own decisions.

If you’re in a financial position to do so, you may also want to put money aside for your funeral costs. While everyone’s preferences will differ when it comes to life celebrations and funerals, costs can really add up – these days, the average burial costs around £4,383, while cremations cost around £3,290. Here, you may want to look into pre-payment; again, it might sound a little morbid, but it will mean your family and loved ones will have less to worry about after you’ve passed away.

Protecting yourself against potential scams

Research shows that scams targeting older adults are, unfortunately, on the rise. So, it’s wise to educate yourself about some of the common scams targeting people at the moment because, with increasingly sophisticated scams, it’s easy to fall prey to them.

Energy scams are particularly prevalent right now due to the ongoing energy crisis. Many scammers are posing as Gov.uk, Ofgem, or an energy company, claiming that you have an energy rebate to claim. However, bear in mind that if you are entitled, this will be directly applied to your bill, or received by voucher.

Some other key advice is to register with the Telephone Preference Service to reduce unsolicited calls. This can be done here. Likewise, don’t open any suspicious texts, pop-up windows, email attachments or email links.

Tags: houses, Later life, money management, retirement, wills

Weighing up early retirement

by Madaline Dunn

When it comes to thoughts about retirement, many can’t wait to clock out for the last time, willing it to come as fast as possible. A third of people, for example, want to retire by the age of 60.

That said, very few believe they’ll actually achieve this. Research from Hargreaves Lansdown found that adults aged 34 and under expect to retire when they’re 63, on average, while only one in eight believes in the feasibility of retiring by age 55. For those further on in their lives, for example, those aged 55 and over expect to retire much later, 68 years old on average, and as many as one in five believe they’ll have to wait until 70 years old to retire.

Research from Canada Life has, however, found that more than two in five UK adults aged 55-66 years old have taken early retirement since the beginning of the pandemic in March 2020. Still, it’s important to note that new research finds little evidence for the so-called ‘Great Retirement’ and instead cites long-term illness as the reason for large swathes of older workers leaving the workforce.

In this week’s article, we’ll explore the following:

• The motivations behind people pursuing early retirement,
• What’s required to retire early and how to plan for it,
• The risks associated with early retirement.

The motivations for early retirement

While many view retirement as the end of one’s working life, for many, it can actually be an opportunity to pursue a new career, look into consulting, volunteering, or even get back into education and study. Others see it as an opportunity to spend more time with their family and get back in touch with themselves and their passions.

Of course, not all are looking to leave the workforce solely to enjoy their golden years. According to Dr Afik Gal, co-founder of Assured Allies, age discrimination can play a part in pushing people into early retirement. Likewise, layoffs can also be a reason for early retirement, as can declining health.

What’s required to retire early and how to plan for it

When considering taking early retirement, there are a few things that will be required to ensure the process is as smooth and sustainable as possible. To begin with, it’s worth asking yourself some questions to ensure that you’re both emotionally and financially ready to retire. Some of these questions include:

• Have I got any debts I need to pay off? When looking to retire early, it’s important to ensure that you pay off debt and avoid accumulating further debt, as far as possible. Long-term and short-term loans come with interest and divert money away from savings.
• Do I need to pay off my mortgage? If you can afford it, making overpayments on your mortgage can help you pay it off sooner rather than later, and you’ll pay less overall. That said, be sure to check whether you’ll be faced with any repayment penalties before doing this. Some advisors also warn that you might risk depleting your liquidity, so make sure to check whether it’s the right move for you.
• How much money will I spend each month, and do I have enough for daily expenses? Having a clear idea of where you are financially will help you make this decision much more easily and work out a budget for basic day-to-day living. It’s also worth noting that the figure you come to will likely increase yearly with inflation.
• How much do I require for my discretionary funds? While you may have the basics covered, it’s important to factor in the money you’ll want to spend on leisure activities, treats and holidays. If you’re in a situation where you’re just scraping by each month, you’re unlikely to enjoy your early retirement.
• Have I planned for unexpected events and emergency savings? For most, life is rarely straightforward, and whether it’s a medical emergency, a burst pipe, or, say… a pandemic, you’ll likely face a few curveballs in the years to come. It’s a good idea to have an emergency savings fund to prepare for these unforeseen events.
• What are my plans for after I retire? Experts say that it’s key to make plans post-retirement for fulfilment and mental stimulation. Do you plan to pursue a new hobby, volunteer, or study?

When you’ve weighed up whether or not an early retirement is for you, there are a few actionable ways you can plan ahead.

Once you’ve figured out the sum of what you’ll need to survive and thrive in retirement, it is key to make an inventory of all of your assets, so you can determine where your retirement income will be derived.

You’ll need to review your pension options, too. You won’t be able to access your state pension until you reach state pension age, and if you retire early, you might be entitled to less. Likewise, it’s important to check the rules around your personal or company pension – in some cases, you may not be able to access it early, but on the other hand, if you retire due to circumstances out of your control, such as illness, you might be able to access an enhanced pension. The details will also be different regarding defined contribution pension schemes, so be sure to get your ducks in a row.

Once you’ve looked into your pension pots, also assess any investments you have, how much your property is worth, and whether downsizing could be an option. Equally, you may decide on a phased retirement or decide to take up part-time work to supplement your retirement income.

After that, experts advise you to make a savings and investment plan, and if you follow the FIRE movement to retire early, set aside 25% and 50% of your monthly income.

It’s also worth speaking to a financial advisor, who will be able to guide you through the process and help you weigh up your options.

What are the risks associated with early retirement?

Early retirement is not without its risks. From a financial perspective, it’s important to note that economic recession, inflation and unexpected medical expenses can leave you in a position you may not have prepared for.

Right now, for example, inflation is at a 40-year high, and the cost of living is rising sharply. Likewise, if your pension doesn’t stretch as far as you thought it might, you may have to re-enter the workforce, which could come with challenges, especially with an employment gap. It’s also worth bearing in mind that you might live longer than you’d expected and so, it’s a good idea to make sure you can pay for the cost of care in later life.

Aside from the financial side of things, it’s also key to note that some research suggests that early retirement can be bad for the brain. Some research, for example, has found that those in retirement have a 38% faster rate of verbal and memory loss than those still working. Likewise, the National Institute of Health estimates that a third of individuals in retirement have symptoms of depression.

Tags: early retirement, Jobs, retirement, savings