Home Equity Release Schemes – Pros and Cons: Do Home Reversion Plans Help to Provide a Good Retirement Income?
Home equity release schemes appeal to seniors seeking an additional source of retirement income. Whilst pension credits are utilised to top up the state pension, this regularly isn’t deemed sufficient to live an active and fulfilling life.
What are Home Equity Release Schemes?
A home equity release scheme is a means of using the equity in the family home to receive a cash lump sum and/or retirement income. The retired person is allowed to continue living in their home for the remainder of their life or until they enter a nursing home.
Advantages of Home Equity Release Schemes
- Additional income. In excess of 50% of over-65s’ wealth is tied up in property so it makes sense to use a home equity release scheme to receive an additional retirement income;
- No need to move house. There is no requirement that anyone signing up to a home equity release scheme needs to move house;
- Moving house. With the permission of the equity release company, it is still possible to move home. Always check the terms and conditions before signing the agreement;
- Availability of flexible equity release products. Seniors can now choose to accept a retirement income in return for a percentage of their property meaning that some of the equity can still form part of their inheritance;
Disadvantages of Home Equity Release Schemes
- Loss of pension credits. Receiving an income from a home equity release scheme may remove eligibility for certain means-tested benefits, such as pension credits or help with paying for care. According to Age Concern, about a third of pensioners receive pension credits so it is a potentially big issue;
- Complexity. A lot of seniors don’t fully understand how home equity release works. This could mean that they don’t realise the implications for their estate and the effect on any inheritance for their children;
- Early redemption charges. Those that decide that equity release isn’t for them will face a high early redemption penalty. It is important that a senior is certain that they are doing the right thing;
- Marketing. Whilst equity release can help create a decent retirement income, it is often marketed as a panacea and uses vivid images of elderly people living their dream life by the sea. This can create unrealistic expectations that will never be realised.
Whilst equity release offers seniors the opportunity to receive a higher retirement income, there are also a number of pitfalls. Equity release may remove entitlement to state benefits, such as pension credits. Seniors seeking a cash lump sum may wish to consider a sell and rent back scheme.