Topping Up Your Pension: Equity Release Schemes.

With pension pots dwindling, you may find yourself with a smaller income in retirement than you’d hoped for.

Equity release is one way of accessing any money that has built up in your home, but there are pitfalls to watch out for.

While many retirees are cash-poor, they often have plenty of money locked into their homes as they have little or nothing left to pay on their mortgage. Equity release is a way of raising money from your home to give you an extra income in retirement, but without you having to move house.

Lifetime Mortgages & Home Revision Plans.

There are two types of schemes – lifetime mortgages and home reversion plans.

The Lifetime Mortgage works in the same way as a standard mortgage, allowing you to borrow money against your property. You’ll be charged interest, although most plans roll the interest into a big chunk, so it’s paid off either when you die or when you move or sell your home.

Home Reversion Plan involves a company buying all or part of your home at between 20% and 60% of its market value in return for providing you with either a lump sum or a regular income. The company will earn its money by selling your home when you die or move into care.

Who is eligible?

Typically, equity release is available to those aged between 55-70 who own their own home. The property must be worth at least £30,000 and be in good condition. Bear in mind that the younger you are and longer you have to live, the more expensive it will be.

Could it affect my benefits?

Any savings you have, including any equity released from your home, will be taken into account when assessing means-tested benefits such as housing and council tax benefit.

Presently you can have up to £10,000 in cash or savings before your benefits are affected. The upper limit for receiving any benefits is £16,000; after this you won’t be eligible for any state help.

You should always get independent legal and financial advice before making an equity release application. Many providers will insist on this. You should also discuss your plans with family as it will affect any inheritance.

It’s a complex process, and while it’s a good option for some, it might not be suitable for others.

There are also additional charges to watch out for. As with a mortgage, arranging an equity release plan will involve a Valuation fee, linked to the value of the property, but often around 1% of the property’s value; an Arrangement fee can cost up to £750 and legal costs, which could cost anything from £300 to £700.

With a home reversion plan, you may also have to pay a nominal amount for rent. And of course, releasing equity from your home also means that there will be less money to leave for your loved ones.

Contrary to popular belief, an equity release plan will not force you to stay in your home until you die. Many lifetime mortgage plans will allow you to transfer to a new property, although this depends on the lender.

Home reversion plans are also portable, as long as the property meets certain conditions laid down by the provider.

Before the arrival of the equity release trade body Safe Home Income Plans (SHIP) in 1991, equity release products weren’t regulated. This meant that customers could risk falling into negative equity and end up owing more than the value of their home. But providers have since cleaned up their act. The market is now tightly regulated and they must follow the industry code of conduct set down by SHIP, which includes a safeguard that ensures you can’t ever slide into negative equity