Sharp rise in Scots using equity release

PENSIONERS in Scotland will become increasingly reliant on equity release to boost their retirement income over the coming years, it has been predicted.

While concerns linger over the potential implications of unlocking money from your home in retirement, new figures show a sharp rise in the number of Scots using equity release plans.

Demand has accelerated as worries grow over living costs and personal debt difficulties continue to escalate. More than a third of pensioners north of the Border are finding it harder than they expected to cope financially in retirement and are bridging the gap by taking on part-time work, downsizing their home or taking out equity release plans, according to research by insurer Prudential.

Scots over the age of 55 used equity release to take almost 22 million out of their property in the first six months of 2010, a 27 per cent increase on the same period last year, Key Retirement Solutions has revealed. The equity release adviser also reported a 27 per cent spike to 589 in the number of new plans taken out in Scotland, the biggest increase in the UK.

Scots were also far more likely than homeowners elsewhere in the UK to use the released funds for regular day-to-day costs and unexpected expenses in the first half of this year.

Dean Mirfin, group director at Key Retirement Solutions, believes the figures show that Scots want the money as part of their financial planning for the future, rather than for short-term spending such as holidays and home and garden improvements.

"Many feel that, day to day, their retirement income can meet their needs, but require additional capital to meet the costlier expenses which come along," he said.

The trend is also being driven by a slow property market in which homeowners are finding it difficult to downsize.

Scott Rasmusen, partner at Edinburgh law firm Gibson Kerr, said: "Many retirees own their own property and this is likely to be the biggest asset that they possess. But rather than making this asset work for them, they put off selling the property until the last moment or bequeath it in their will, potentially having to pay IHT. In many instances, the better option is for them to use the property to help fund their retirement."

The funds pulled down from property could make all the difference between a comfortable retirement and a financial struggle, he claimed.

"With the ongoing cuts to public sector jobs and pensions, and with the effects of the recession still being felt by many people in Scotland, it's highly likely that equity release will become increasingly popular as a method of funding old age and paying for the rising cost of elderly care in future years."

Not everyone applying for an equity release scheme is accepted, however. Lenders take into consideration your age - some have a minimum age of 60 - the condition of the property and the existing mortgage.

The older you are, the more likely it is you will be able to borrow. Borrowers are generally expected to have no outstanding mortgage, although it's still possible to take out a plan where there is some mortgage left, provided some of the money is used to pay down the loan.

But, as with anything in life, there are complications. Potential drawbacks include the costs and the implications for any family members who might hope to benefit from the sale of the home at a later date.

While unlocking money from a home can cause family disputes by eroding the value left to children at death, it can also help mitigate inheritance tax (IHT) by allowing the owner to pass on cash from a home on which IHT at 40 per cent would be due if it is passed on in full. Equity release can also impact on any benefits the homeowner receives.

There are also costs to consider, with the interest rates on the loans typically higher than those on conventional mortgages (a gap that has widened of late). Borrowers can expect to pay between 6 and 8 per cent.

The loans are expensive when compared with the cheap fixed rates currently available on conventional mortgages. The amount owed by a 65-year-old unlocking 80,000 from their home at an interest rate of 7 per cent could reach nearly 350,000 by the time they are 85.

Gordon MacRae, head of communications and policy at Shelter Scotland, warned that homeowners can put their long-term security at risk by taking out equity release plans.

"While equity release can be part of a long-term financial plan, it should not be seen as a short-term solution to help with regular day-to-day costs. Homeowners should be aware of the long-term implications of borrowing money against the value of their home; it will limit any other future options they may have had in relation to their property, can affect entitlement to certain benefits and will reduce access to capital in retirement."

He urged anyone considering using equity release to do their research, take advice and ensure the provider they use is regulated by the Financial Services Authority (FSA).

Rasmusen advises using only equity release providers accredited under the Safe Home Income Plans (Ship) scheme, which promotes safe equity release plans.

"This will provide important guarantees, such as maintaining the right to live in your property for life, the freedom to move home without incurring any penalties, and ensure that you never owe more than the value of your property," he said.

Members of Ship are listed at www.ship-ltd.org/. To check a firm or broker is on the FSA register, visit www.fsa.gov.uk or call 0845 606 1234.

Equity release is aimed at homeowners aged 55 or over who want to unlock the cash tied up in their property. Most schemes allow homeowners to borrow money against the value of their home, with the debt repaid from the sale of the property after they die.

Around three-quarters of plans are taken out on a drawdown basis, where borrowers can take out as little as 10,000 from their property, with the option of pulling down more later. Money released from the value of a property is tax-free, although capital gains tax or income tax may come into play if it were invested.

There are two main forms of equity release: lifetime mortgages and home reversion plans. Lifetime mortgages, which account for the bulk of the market, allow borrowers to take out a loan against their home, either as income, a lump sum or a combination of the two. The interest on the loan is rolled up and repaid out of the proceeds from the sale of the property after death. While that increases the income the borrower gets while they are alive, it can significantly reduce the amount left to any family on death.

Under a home reversion plan, the borrower surrenders some or all of the ownership of the home in exchange for a lump sum payment (below market value) or monthly income, or a blend of the two. They continue living there as a tenant - rent-free - until it is sold on death. The proceeds the insurance company gets from the sale reflect the amount of equity it bought.