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Retirement Finance

Equity Release: Seven Key Questions Answered

Over the years, we have had many questions about equity release schemes. Having reviewed all the questions asked, we have refined them to seven key questions. These are the questions most people need to resolve before they commit and move forward with some form of equity release. So if you are considering generating some cash from your home read on.

What is Equity Release?

Equity release schemes are ways for older people usually fifty-five or over to use their home/ property to get them some cash. There are many schemes and providers. As a significant financial decision, possibly the last major such decision you make, you must get it right the first time.

Broadly speaking equity release comes in two flavours:-

Lifetime Mortgage

The most common equity release scheme is the lifetime mortgage. This type of plan allows you to borrow against the equity you hold in your home. Usually, you have to be over fifty-five. The interest rates are either fixed or capped. Typically there are no repayments during your lifetime.  This knowledge gives you an idea of the rate at which your debt is mounting. The mortgage becomes due on death and proceeds of the house sale, clear it. The compounding effect of the interest and lack of payments mean the mortgage debt mounts rapidly. The plan has an impact on your estate.

There are some variations, where the money raised is paid in stages or repayments are allowed.

Home Reversion

The home reversion plan is more what people think of as equity release when we have spoken to them. Essentially you, the homeowner(s) sells the plan supplier a share of your property at a discounted rate, to reflect their risk and the time they will have to wait to see a return. You maintain the right to live in the property.

For example: if your house is worth £280k and you want to raise £50k (circa 18%) you might have to give the financial institution a steak worth £100K or 36%. The equity release company are speculating on various factor when calculating the percentages; life expectancy, property growth values etc. The complexity means it is difficult to get quotes as different companies look on the actuarial data in different ways.

Finally, the older you are, the better the deal you are going to get. Plans are available from age sixty-five though some are as low a sixty.

Are we eligible for an Equity Release Plan?

As with all things, there are always hurdles to overcome in the pursuit of getting a decent plan. However, they are not as tricky as a house purchase mortgage or a re-mortgage since no repayments are due to the company until death.

The first criteria are age; fifty-five for a lifetime mortgage plan and 65 for a revision plan, if a couple both of you. The property needs to be in the UK and your principal residence. A survey will be required so it must be in a reasonable condition. Preferably with no dependents living in the house with you.

Also, you need to have equity and title in your property and.

How Much Money Could we “release”?

There are no set rules on this. The amount you borrow for a lifetime mortgage plan or release on a Revision plan depends on several factors.

Lifetime Mortgage

The main factor determining how much you can borrow/ release is age. The provider will set a ceiling percentage of the property value. The ceiling is calculated based on age and or health of the applicants. Older and less healthy applicants are allowed a higher ceiling and borrowing more. Typically someone you will be able to borrow less than half of the property value for older applicants with health issue could borrow 60%.

Home Reversion Plan

The same factors apply, health and age. The older and less healthy you are the lower the discount required on the percentage you wish to release. A younger applicant in good health with good life expectancy might only get 20% of the share they want to release. An older applicant with poor health and a limited life expectancy could get 60% of the part.

For either pan, as you can see, the cash that could be made available is very much dependant on your age and health. There is only one way to get an accurate estimate of what could be available approach a specialist to discuss your particular circumstances.

Is Equity Release a good idea for us?

Equity release of either type is a way of raising some cash and possibly reducing your outgoings, by paying off cards, loans mortgages etc. So it is particularly useful when you get to retirement age if your pension provision is not very good. The money can be released in stages, very useful during retirement.

TypeProsCons
Lifetime Mortgage  No Need to moveNo monthly paymentsNegative Equity GuaranteeLow-Interest RatesNo Inheritance taxFlexibilityCompounding interestHigh Penalties to changeState Benefits may be lostCan’t use the house as collateral again  
Home Reversion Plan  No need to moveThe lump-sum is tax-freeAlways have a proportion of house for beneficiariesYou will receive a low sum for the equity given upNo longer the sole ownerExpensive option if you pass early  
Pros and Cons of Equity Release

What Pitfalls Do We Need To Lookout For?

As with any financial scheme, there are risks and pitfalls.

Impact on benefits

Having an influx of cash can impact on your means-tested benefits is you receive them, particularly:-

  • Pension Credits
  • Council Tax Support
  • Jobseekers allowance
  • Income Support
  • Income-related Employment and Support Allowance
  • Universal Credit

Some disappear at retirement age anyway. The impact of “unintended consequences” is one reason why taking expert advice is sensible before committing to either type of plan.

Reduced Estate/ Legacy for dependants

The money you leave on death is impacted by Equity release lifetime mortgages build up debt rapidly as no payments are due. The debt is paid when the house is sold. This happens after the death of the last participant in the plan, or when/ if they have to go into care. This reduces the total value of the estate going to your beneficiaries

Loss of Control

If you own your house outright, you can make any decisions you want about the property. With either type of plan, this freedom is lost. The home reversion company owns a portion of the house. The lifetime mortgage company has a lien on the property.

Are There Any Alternatives to Equity Release?

Do you want to raise some cash but not use an equity release plan? There are a couple of options you can investigate.

Downsizing

Downsizing is selling your property and moving to a less expensive property that fills your needs but releases cash. Sometimes there are additional benefits of a smaller property, e.g. cheaper to run, less to clean etc. There is a lot to consider losing friends etc. but that is for another post.

Re-mortgaging

The re-mortgage is not age dependant; basically, it is raising a mortgage against the property, but making payments, thus reducing the impact on your estate.

How Much Will It Cost Us?

Costs vary depending on the complexity of the matter and the amount required. Usually, the fees are calculated on a percent of the money raised, with a minimum charge. Some companies have a lower fixed price, but other charges may be higher. You need to see an expert to know.

How Do We Know We are Getting The Best Deal?

Expert Advice

You need to locate a good broker who can assess which scheme will be best for you. Brokers in this area are all governed by the Financial Conduct Authority. Should anything go wrong, you have recourse to the FCA for help and potentially compensation.

Equity Release Council

All equity release providers affiliated to the Equity Release Council are bound to have minimum terms that include that:-

  • you have until death or a move into permanent care to live in your home
  • You can move properties (providing new property acceptable.
  • The debt will never be more than the value of your home.

Contacts:-

https://www.equityreleasecouncil.com/home/

https://www.fca.org.uk/

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Uncategorized

Cryptocurrency for the Uninitiated

Financial Products: Key Benefits – Helping you Understand Your Money

You may have heard a lot about cryptocurrency, probably from cold callers intent on parting you from your hard-earned cash. Is it a panacea for all ills or a tool to exploit the naïve. In this post, I will endeavour to give you the basic in straight forward language, not setting out to bamboozle you.

What is Cryptocurrency?

Cryptocurrency is a virtual currency that’s security is based on advanced cryptography. Like a hard currency it can be used for financial transaction, even some small traders now deal in cryptocurrency. It is fundamentally secure money developed for the internet.

What is “crypto mining”?

A bit of a misnomer. Crypto mining is primarily using your resources, electricity, computer power etc. to provide the power behind the bookkeeping services required for crypto coin transaction. As a reward for this, you receive a fraction of coins every so often. The volatility of the market in say bitcoins causes dramatic swings in its value if it is up, you can make a lot of money, but it can also plummet.

It is an expensive hobby frequently the cost of electricity outweighs the income generated. Since the release of Bitcoin around 6000 cryptocurrencies have been release as people try to speculate in this area.

Who is in control?

These are decentralised, so no one and everyone is in control.

Why would I want t use it?

Cryptocurrency comes into its own for online secure, anonymous financial transactions. Due to is security and lack of oversight is has become famous for tax evasion, money laundering, holding illicit assets as well as its legitimate uses.

Who are the players?

There have been over six thousand cryptocurrencies since Bitcoin started the ball rolling, here are some of the key players:-

Bitcoin

Invented in 2008 by someone using the name “Satoshi Nakamoto” a year later the source code for the currency was released on an open-source basis so that anyone could use it. It is the first and most successful of the new cryptocurrencies.

Learn a little more: https://bitcoin.org/

Ethereum

This cryptocurrency was released six years after bitcoin in summer 2015. Currently, it is the second-largest cryptocurrency after bitcoin. Unlike bitcoin, Ethereum is programmable so developers can produce innovative new financial apps. It is used globally for many financial transactions, to hold assets or as collateral.

Learn a little more: https://ethereum.org/

Ripple

Released in 2012 this cryptocurrency was developed by Chris Larsen and Jeb McCaleb. It is a combination of a financial payment gateway and cryptocurrency. Currently, it lies in the third position after Bitcoin and Ethereum. Its US is that it enables transfers of money in any form, USD, Bitcoin, Sterling etc.

Litecoin

Almost a homage to bitcoin this cryptocurrency is what the name implies a “lite” version of bitcoin. It was established in October 2011

Learn a bit more: https://litecoin-foundation.org/

Monero

Launched in 2014 this is another private, untraceable cryptocurrency. Their principal aim is privacy and unlike other cryptocurrencies, fully anonymous transaction.

Why don’t Governments like them?

For many years governments around the world through their central banks have used money, itself just a complex concept, to control several financial indicators principally inflation/ deflation through both money supply control and interest rates, i.e. the money available and the cost of borrowing money. This power gives governments individually, and in concert, great power over the lives of their citizen’s, cryptocurrencies threaten the lever of control.

In the UK a gradual encroachment on the individuals right to privacy has been supplemented by an increase in oversite of money into and out of bank accounts. It is argued that this is simply a way of uncovering illegal use of cash and helps in the fight against crime and particularly terrorism. It is particularly useful in assisting tax evasion.

All in all, the loss of control or influence over the money markets hampers governments ability to control the population, what politician would want that?

The Roundup

Cryptocurrency may if Governments allow it to develop, be the future of money. It has a lot of benefits security, anonymity, ease of use etc. However, governments are cracking down on them, on the face of it, as control of criminal activity but more likely to retain the levers of power that currency control gives.

The “cold call hype” is offering two ways to cash in on the phenomenon of investment in currency to speculate on its future value and secondly mining, which is prohibitively expensive for the traditional currencies. It would be unfair to say there is no possibility of making money people have. It is merely another high-risk venture and with many cold calling companies only a scam to part you from your hard-earned money.

Categories
Borrowing

Mortgages- What are they?

  • There is a lot of talk about mortgages, but what exactly is a mortgage? I will try to give you a broad overview of what they are all about and what the terms mean.

In a nutshell, what is a mortgage?

A mortgage is a loan to buy a property. The loan is secured on the property. The security (sometimes called the lein) means that if the borrower fails to make payments to the lender, usually but not always a bank or building society, the lender can take possession of the property, sell it and recover their loan plus the costs of doing so. There are several different types of lenders from high street lenders to specialist lenders. You can either apply direct or go through a mortgage broker. If you have a bad credit history or difficult circumstances then there are specialist mortgage brokers you can go to who are specialists in helping clients get mortgages with bad credit

Terms you will come across.

The term– This is how long the mortgage is set to last. Most mortgages certainly for first-time buyers are set-up to run twenty-five years the term can be different though.

Advance– This is the amount of money the lender puts forward to help with the house purchase.

Deposit– Usually, the lender will want the buyer to put forward at least some of the money, this is known as the deposit usually a minimum of five percent.

Valuation/ survey– The lender will require that a local surveyor independently values the property you want to buy, so they know the loan can be recovered if they need to repossess.

Repayment Mortgage– with this sort of mortgage both the interest on the loan and the loan itself re repaid over the course of the term.

Interest Only Mortgage– With an interest-only mortgage, only the interest on the loan is repaid over the term the loan is paid off at the end.

Fixed-rate– The interest rate on the loan is set for a period of time usually two to five years, though it can be more. This means your payments are fixed and you know where you are.

Variable-rate- The interest rate will go up and down as the interest rate set by the bank of England changes. Sharp rises can cause money problem as the payment will go up.

Discount- This is when the lender offers a discount on their normal ate of interest for a set period of time as an incentive to use them. This gives smaller repayments at the beginning  the mortgage

Tracker- they promise to follow an interest rate for a period of time e.g. base rate plus 2% means the rate of interest set by the bank of England plus two percent. They come in various terms up to the life of the mortgage.

Capped- there is a ceiling on the level of the rate so even if the base rate goes very high the maximum you have to pay is set.

Capped and Collared As but combined with a minimum level of interest you would pay.

Offset Mortgage– If you have savings, you can offset the savings interest you receive from the mortgage interest you need to pay, saves tax if you have the money.

Interest Rate– this is the amount the lender wants you to pay back for them to lend you the money you need. The rates generally revolve around the bank of England base rate.

Fees– some lender charge fees for you to borrow from them i.e. arrangement fees, they can be expensive so check them out.

Conveyancing- This is how the ownership of the property is passed from the current owner to you, check that the property is free from problems is part of the conveyancing. Carried out by either a solicitor or licenced conveyancer.

Extra Information

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Uncategorized

About: key benefits

Key benefits were established to help people understand complex Financial Instruments and concepts using straightforward everyday language.  We wanted to help people who had little experience of Financial Products learn the basics.  So when you are dealing with banks or building societies, you have an understanding of what the advisors are talking about.

Knowledge is the key to dealing with Financial Products successfully.  Financial institutions frequently bamboozle people with complicated language and overly complex information.  We no longer work in the financial field and we felt we could pay back a little bit by helping people. We want you to get the best out of your financial products by ensuring that you have an understanding of the concepts behind the products on offer.

Something you may notice about this blog is that there is no advertising.  We have no relationships, affiliations with any finance companies, insurance companies or lending companies.  We do not make any commission from this blog so you can rest assured the information we pull down is unbiased and accurate to the best of our belief.

As we are no longer financial advisers or regulated in any particular way we are not able to give any advice to any individual, this blog is purely for information.  We suggest that when you are looking for Financial Services product, you research well, use our blog to get a basic understanding.  Typically don’t sign up for anything on the first meeting, take the information you get away and read it.

We are always keen to make our blog informative, please get in touch if there is any particular product or service you would like some information on we will be more than willing to write something.  Please don’t email for advice as we will be unable to provide to it, and we don’t like to disappoint.

Thank you

Kiara

Categories
Retirement Finance

Pensions: What is a stakeholder pension?

Steak holder pensions are modern pensions, usually, for self-employed people, companies can also use them for auto-enrolment. Stakeholder Pensions will allow holders to supplement their income in retirement. They are not a replacement for the old-age pension (at least not at the minute). You can still get the old style personal pension. Still, the charges and fees are higher, stakeholder pension fees are capped by the Government.

The Advantages

Standards, this is the key benefit of the stakeholder pensions. The Government stipulates four minimum requirements for a Pension company’s pension scheme to be considered a stakeholder pension:-

  •  Lower charges, maximum fees are 1% of the value of the pot after the first 10 years before that it is 1.5%, offsetting the initial setup charges
  • Flexibility, you can stop and start payments at any time and adjust your monthly premium/ investment. You can also switch to a different provider free of charge.
  • Independent Security, the pension must have independent trustees
  • Easy start-up, these plans can be started from as little as twenty pounds a month.

Why Not Just Save with and ISA

Isas are an efficient tax-saving vehicle, but the lack one great benefit of the pension plan; tax relief. Whereas in an ISA your taxed income can be saved or invested, and your income or growth is tax-free. A Pension has these same benefits, but any money you pay in you get tax relief for up to an annual limit of £40,000 at the moment. For basic rate tax payers, the relief is paid directly into the pension, Higher rate payers will have to reclaim the difference through their tax return. So basically for the same cash, you pay in the Government throws in the tax you paid on that money. The total grows tax-free throughout the pension.

What Do I Do With My Pension Pot?

Once you reach your retirement you get access to your pension pot, then you have to decide how you are going to use it (detail in another post ). But you can:-

  • Buy an annuity, guaranteed income for life.
  • Cash in, 25% tax-free the rest taxable
  •  Drawdown, take a smaller payment for a longer time.
  • Take lump sums, 25% of each is tax-free.

I hope this has helped, please read our other posts.

Categories
Savings and Investments

What Exactly is and ISA?

Well you would be correct in thinking the ISA is a sizeable domed temple in India, however, in the UK its more frequently thought of as a tax-efficient saving scheme. The y were introduced in 2008 to replace the then range of tax-efficient plans, PEPs TESSAs etc.


Is there only one type of ISA?

No, the range of ISAs available has grown over the years, becoming nearly as confusing as it was before the ISA was introduced. There are six types of ISA:-

  • The Cash ISA
  • Stocks and Shares ISA
  • Lifetime ISA
  • Innovative Finance ISA
  • Junior ISA

What are the differences?


The Cash ISA

The Cash is what it says on the tin, a home for spare Cash, up to £20,000 pa. Any interest earned is tax-free. Within the umbrella of the cash ISA there are three flavours of ISA;-


  • Instant Cash- you can deposit and withdraw whenever you want, interest is variable. Most like the traditional savings account.
  • Fixed-Rate- You put your lump away for a set period and are guaranteed a set return.
  • Regular -savings- commit to a minimum deposit each month, and you will be rewarded with a fixed interest rate.

Requirements: you need to be over age 18 to have one.


Stocks and Shares ISA

Want to dabble in the markets? The stocks and share ISA allows you to invest up to £20,000, all returns are tax-free, i.e. no capital gains tax or income tax. This comes in two flavours:-

  • Managed- Fund manager manages your account, you pay fees
  • Self-select- Choose your investments, still some expenses to the broker.

Requirements: Have to be 18 or over

Lifetime ISA

Government-backed scheme to encourage saving either for a home or retirement. You can go for Cash or shares with this ISA, the cap for either £4000 pa. The Government tops up the savings/investment by 25% or £1000 pa

Retirement Option 

you have to be over 18and under 39 to take this ISA. You stop paying in at fifty and car reap the rewards at age 60.

House Purchase

Again age limits are 18 and 39, yo need to be first time buyer to benefit from this option.

If you take either of these, presuming you save £4000 pa you have £16,000 of allowance available for other ISAs.

Innovative Finance ISA

The most esoteric of the ISA family, basically a vehicle to hold a peer to peer lending pots. You lend other usually bank rejects set a higher interest rate If the loan is repaid you win. However, its higher risk and you can lose your money. There is a £20,000 limit, and you have to be over 18.

The Junior ISA

The only option for children. Taken out by parents/ guardian for children aged under 18. Up to £9000, a year can be paid into the account. At age eighteen it matures and become an adult ISA in the child’s name

Conclusion

This concludes our introduction to Government-backed savings plans. Other options are available, and since the start of the personal savings allowance they may be more flexible and competitive.

Categories
Retirement Finance

55 plus? What Are Your Pension Options

In April 2015 the rules governing Pension was relaxed substantially to allow more flexibility for pension pot holders. i.e people who had built up a pension pot through a money purchase or defined contributions scheme.

Prior to the changes investors in pension plans were restricted as to when they could retire with your pension., typically age sixty or over. The pension could only be taken as an annuity plus lump sum or an annuity only. Now their are much more flexible options:-

Leave It To Grow

You don’t have to take your pension, you can simply leave the pot to grow in it’s tax free environment until you want/ need it. No action needed.

Dip In

Rather than have a formal arrangement you can simply dip into the pot and take money as required. The first 24% of money you take in a tax year is tax free,the remainder is taxed as income, so if you have the latitude in your tax arrangements e.g. your taxable income is less than your allowance you can also take the difference tax free.

There are tax issues to consider, so if you have complex tax affairs it might be worth getting some professional advice.

Annuities

This what you used to have to do with at least a portion of your pension. An annuity is a guaranteed income from an investment for life, there is no capital value on death. The income varies depending on the plan provider and your heath (for a change you get more as a smoker). The flexibility here is that you can take the benefit earlier.

An annuity is most often purchase in conjunction with taking the tax free lump sum as cash. There are numerous options that effect the payment, whether fixed or increasing, dependents benefits etc.

Pension Draw Down

This approach has a lot in common with the previous option. The investor usually take 25% tax free cash. The difference is that instead of buying an annuity the balance of the pot buys an investment to provide an income. This income isn’t guaranteed and may vary. However it is more flexible than an annuity and may have residual value when you die, so estate might get something.

Take it all

This is an attractive option to many people until they realise the tax implications. You can take 25% tax fee, the remaining three quarters are subject to tax, so you lose a big chunk of your pot. Longterm you may run out of money etc. This is a a realistic option if are terminally ill or have a strong need for an influx of cash.

Summary

The pensions market has been relaxed so people can decide the best way to deal with their money at retirement. This is just a flavour of your options. Many people in retirement take advantage of the growth in property values to supplement their income through equity release.

Interesting links:-

https://www.pensionwise.gov.uk/

https://www.moneyadviceservice.org.uk/en/categories/pensions-and-retirement