Isn’t it funny how the simplest of things pass by us unnoticed. When we look at the equity release market over the past few years and the huge developments in product innovation we tend to focus on product and yet, as I have previously written, we may not fully devote the appropriate amount of time to analysing purpose. Purpose for a lifetime mortgage though may seem fairly obvious in facilitating either the provision of capital, income or both to those who have the need or want to do so.
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Over the years though we have made some strides to think outside of the box and look at the bigger picture and the roll of this expanding phenomenon, with some efforts more successful than others. The area which has had much attention has been that of inheritance tax (IHT) planning. Unfortunately though this has had a mixed success as it has been rarely pursued by those who are expert enough in this field and who have stretched their thinking, and indeed the products, to provide a meaningful solution to this huge issue.
Beating the taxman
The FSA, through its mystery shopping and thematic visits on firms, has analysed much of the attempts to beat the taxman with bitter conclusions. In the main, many attempts are questionable in whether they will actually leave the clients estate in a better position and in some cases the situation could actually be worsened.
Beating the taxman is actually easy through equity release but usually, if not appropriately arranged, the reason why the taxman loses is because the children do as well. The reason for this being that over time the accruing cost of the release can reduce the estate by more than the benefit derived from the removal of the initial funds released from the estate.
That said, Bill Giles, the BBC’s former head of weather, arranged equity release through ourselves last year. He had a clear intent. He wanted funds for himself and also to gift to his children. His view was that the benefit to the children now far outweighed the potential benefit in the future, and in addition the release would reduce the IHT bill in the future. The move was not one to beat the taxman but a view many share that they would rather do anything than let the revenue have the tax. The trade off for Bill has been seeing his children enjoy the funds now.
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So while the challenge for IHT planning and the role of equity release go on there are other emerging opportunities that are far from the obvious and certainly involve some serious out of the box thinking.
Retirement planning
Both are about retirement and pension planning. Now, before you switch off thinking this is about pensions, bear with me. One morning on a very long train journey, I was reading an article about ‘A Day’ and the opportunities which were evolving and a very interesting proposition came to mind. Now I have never met anyone who is totally happy and content with their levels of savings and pension – no surprises there. I pondered the lifetime limit issues and in particular the options for funding in the year of vesting. See what you think:
John looks at his open market option on his pension and sees the shortfall in his fund. He needs a further £100,000 to achieve his ideal income level. He has very little savings. Luckily his adviser has joined up with an equity release specialist to offer a potential solution. He releases £60,000 from his property which he puts into a pension. John is a 40 per cent tax payer and so he receives a credit of £40,000. He has now achieved his pension income target. While the £60,000 is accruing interest on the loan, the benefit of the effect for John of releasing this amount is considerable having utilised the taxation benefits of investing into a pension which he immediately vests.
Many reading this will not be involved in pensions. This form of thinking though should be an encouragement to go and speak to advisers who are and to broaden their thinking about equity release and the potential direct role it can play at the point of pension vesting.
One possible solution which is by no means an obvious one. New life Mortgages last year introduced in effect a buy-to-let option for equity release. This is not a solution for those embarking on the property investment ladder – it is very much one for those who typically already own established rental property.
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Realising capital
Many who do own property at some point need to consider disposal to realise some capital. This creates a number of issues. The first is the potential tax charge. The second is the fact that they may not be selling at an ideal time depending on the property market. Also if they require capital in the short term they may not be able to get a quick sale without taking a hit on the sale price. The third and possibly more greater concern is that the disposal will also therefore lose them the benefit of the rental income they are receiving.
Naturally a solution to this could be a traditional buy-to-let loan. But this again will reduce the net income being realised. The alternative is the option from New Life Mortgages. This option will consider a holding of up to five properties. The advantage of this is that because the loan-to-values are based upon age this can be spread over a number of properties if necessary to achieve the target.
Brian is aged 70 and wants to raise £70,000. He owns three properties valued at £140,000, £150,000 and £190,000. At his age, New life will advance him up to 28 per cent of the assets. His properties total £480,000 so he can raise up to £134,400. He elects to use the lower value properties and raises the £70,000 he needs. Brian has retained the income from all three properties and he also has the option to return for further funds in the future should he wish to do so.
While both of the examples I have presented appear straightforward, naturally they will require considerable work to ensure that the desired effect is achieved. For this reason, the important message is to ensure that you are working with the right type of partners – those who know pensions and the taxation issues involving property.
Ever expanding potential
What the two examples do show is that the potential for equity release is ever expanding and into new uncharted territory. What it also shows is that it does, and will continue to, play an integrated role in the future of retirement planning in the UK. Those who close their eyes to the potential will lose out.
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If your are not in the market and don’t feel comfortable enough to get involved it is easy to get alongside someone who is to share in the new thinking and opportunities which the new product innovations are offering. In the coming years the baby boomers are coming towards their retirement years and the signs are not good for many of them. Pensions are falling far short of their expectations and requirements for them to maintain the standard of living which they want from retirement. We have a unique opportunity to capture a market where in real terms there is no competition. There are no other such opportunities available today.
There are in the market today the tools and support to feel safe. There are more advisers specialising in, and making very good livings from, the equity release market. Either become one of them or join forces with them to benefit before it’s too late. Speak to specialists about the retirement scenarios and speak to others who have clients with property. They will be intrigued by the ideas and no doubt business will follow from those discussions
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