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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.

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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

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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/