Equity release could be way to better retirement

With many annuities not keeping pace with inflation and deposit

accounts paying derisory interest, that dream holiday now looks unlikely to materialise. Others may wish to help a relative or friend financially.

For some, the priority is to clear debt with a survey last year suggesting that pensioners owe 183bn.

This stands at 29,000 each for those aged 65-69 but rises to 35,000 for those aged over 70.

One idea for any home owner aged 55-95 is to take money out of your bricks and mortar. If the property was purchased many years ago, it could now be showing a handsome profit.

An estimated 700bn is locked up this way.

House prices are predicted to soon exceed 10 per cent annually, according to Nationwide, the UK's largest building society. It says the average house now costs 163,481, up 8.6 per cent on a year ago.

Equity release could provide a solution where the property is worth at least 70,000 and has little or no outstanding mortgage. Residential wealth worth 945.8m was unlocked last year and 1.1bn in 2008, according to the trade body, Safe Home Income Plans, known as SHIP, which was launched in 1991 in response to a growing need for consumer protection.

Their members give a 'no negative' equity guarantee which means that the homeowner will never lose their home. In addition, they pledge that anyone signing up to one of their schemes has the freedom to move to a suitable alternative property if they wish.

There are certainly some advantages with equity release:

receiving a cash lump sum or income which is tax-free;

freedom to spend the money in any way;

typically no monthly repayments;

provision to stay in your home for as long as you choose;

reduce the value of the estate and hence inheritance tax liability.

However, it's vital to consider all the options – including moving into cheaper accommodation, renting out a room (which can be tax-free) or taking a loan from family or friends. Compare not only the alternative routes but offers from different providers.

Equity release is not a panacea for debt issues. Although 71.5m was released in Yorkshire and Humberside last year (an average 28,538 according to Key Retirement Solutions), those who used the lump sum advances to repay debts and avoid bankruptcy were effectively converting an unsecured loan into a secured one, which could

potentially aggravate their borrowing position.

Rather than go straight to a provider, seek an experienced broker in the field. Their recommendations are likely to be very helpful.

They will raise a single fee although some providers will rebate all or part of such expense.

Independent professional advice from your accountant, financial adviser and solicitor should be taken. Check also if your entitlement to benefits may be affected.

Then discuss the issue fully with your family and how the money

involved will affect their inheritance.

There are three types of equity release:

Lifetime mortgage where a loan is secured against the value of the property. Unlike conventional mortgages – you do not pay back interest monthly but it rolls up. Both the loan and accrued interest is repaid when the property is sold, either when you move into long-term care or by your estate.

Home reversion where all or a percentage of the property is sold with the right to remain there, rent free, for the rest of your life or until you move into long-term care.

Sale and rent back with the property sold to a finance company which offers the opportunity to rent it back

Only the first two arrangements are fully regulated by the Financial Services Authority. It is part-way through the process of taking the third route under its wing.

Major providers include Aviva, Newcastle-based Bridgewater Equity Release, Coventry Building Society, Home & Capital, Just Retirement, LV (formerly Liverpool Victoria), Retirement Plus and Stonehaven.

Lifetime mortgages are by far the most popular way to unlock property capital, accounting for over 90 per cent of transactions. If you are a couple, the last surviving person can stay in the property.

There is the choice of taking either a lump sum or small regular payments. It is also possible to have the facility to increase the sum borrowed as and when you like up to the limit agreed with the plan provider.

The total sum lent will generally be up to half the property's value but the proportion depends on the applicant's age (or lowest for a couple).

The interest rate is usually fixed at the outset which makes budgeting far easier. Take care regarding the amount of interest that may build up.

If it was a fixed 6.25 per cent, the amount owed would double every 12 years. However, as you retain full ownership, any increase in the value benefits you or your estate.

The equity release provider has a first charge against the property and may impose an early repayment fee if you decide to repay the loan early.

With a home reversion plan, both you and the provider own a percentage of the property, thereby sharing from any uplift in its value, unless you have exchanged 100 per cent. This was the first type of equity release, introduced in 1965.

When the property is eventually sold, the provider takes their percentage share of the sale proceeds.

Typically do not expect to receive the market value as you retain the absolute right to remain in the property, rent-free, for as long as you choose. Some providers require a peppercorn rent of, say, a pound per month.

As a warning, such a plan cannot usually be reversed as you are selling part of your home.

Rather than release all the funds at once, a 'drawdown' option can be offered with either of these two schemes. This means instalments – usually of at least 5,000 a time – are taken as and when required. This saves interest on a lifetime mortgage.

Sale and rent back plans have given equity release a poor name with exploitative advertising and high-pressure sales techniques. Providers generally offer to purchase at substantially below the market value. Sadly, there are too many cases of families being evicted from their homes after the initial 12 months' tenancy.

The FSA plans proper regulation for this route from June 30 with a guaranteed tenure of at least five years and a cooling-off period of two weeks at the point of sale to reconsider the position.

Contact: SHIP 0844 6697085.

Cash to fund home improvements

Seeking money for home improvements, Trevor Griffiths has taken out an equity release plan on his semi-detached home at Rawmarsh, near Rotherham.

Trevor, 67, purchased the property from the local council for around 12,000 and today it's worth around 92,000. Retired from Corus where he worked at the furnaces, Trevor wanted a new washer and new carpets among other improvements. Key Retirement Solutions guided him through the equity release process and recommended a lifetime mortgage through Aviva, formerly Norwich Union.

He took out 11,000 at a fixed 6.05 per cent interest. Currently 6.5-7 per cent is more usual, depending on the provider.

"Don't rush in but ask friends and relatives," say Trevor, who enjoys gardening, walking and driving his motorbike and sidecar.

Contact: Key Retirement Solutions 0800 531 6032.