‘We down­sized to a £1m house to help our son buy his flat’

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re­forms in­tro­duced in April 2015, have cre­ated an­other incentive to use the plans, said Nigel Water­son, chair­man of the Eq­uity Re­lease Coun­cil, the sec­tor’s trade body.

As a re­sult of the re­forms, peo­ple aged 55 or more are able to take their en­tire pen­sion pot as a cash lump. At the same time, the pen­sions “death tax” on un­spent sav­ings was re­moved.

Now, in­stead of pen­sions be­ing sub­ject to a 55pc tax at death, there is no tax to pay if the in­di­vid­ual dies un­der 75. And only in­come tax, at the re­cip­i­ent’s mar­ginal rate, is due if death oc­curs af­ter 75.

This has opened up an en­tirely new field of in­her­i­tance tax plan­ning where the well-off are ef­fec­tively in­cen­tivised to leave their pen­sions in­tact and spend other money in re­tire­ment – in­clud­ing, po­ten­tially, money raised by bor­row­ing against their home.

Fi­nan­cial ad­vis­ers rou­tinely now tell their clients to spend their other as­sets such as Isas, which do at­tract in­her­i­tance tax, first, be­fore emp­ty­ing their pen­sion pots, Mr Water­son said.

“If you’re rea­son­ably well off with a valu­able house and de­cent-sized pen­sion pot it makes huge sense to leave your pen­sion in­tact to pass on tax-free to your chil­dren,” he said.

“Then you can use eq­uity re­lease to give them a ‘liv­ing in­her­i­tance’, to buy their first prop­erty for in­stance, and to save on in­her­i­tance tax.”

The sums re­moved from prop­er­ties via eq­uity re­lease schemes have rock­eted over the past 12 months. More than £700m was re­leased from homes be­tween April and June this year, the most ever in a sin­gle quar­ter. It is ex­pected that 2017 will see more than £3bn in new bor­row­ing, the high­est fig­ure on record.

Eq­uity re­lease plans come in a va­ri­ety of forms but all in­volve tak­ing cash – as a lump sum, as in­come or both – from a home. Typ­i­cally the loan, which grows with in­ter­est that “rolls up”, is paid off only on death. Min­i­mum ages vary be­tween providers but is typ­i­cally 55. It is manda­tory to take reg­u­lated fi­nan­cial ad­vice when us­ing eq­uity re­lease.

In the past, tak­ing a mort­gage out on homes later in life was seen as a last re­sort where all other in­come op­tions had been ex­hausted. The sec­tor was mired in con­tro­versy in the Nineties when thou­sands found that high in­ter­est rates had swal­lowed all the eq­uity in their prop­er­ties.

Since then the City watch­dog has taken over­sight of providers, the vast ma­jor­ity of which now of­fer “no neg­a­tive eq­uity” guar­an­tees that mean loans will never be more than the prop­erty value.

In­ter­est rates are still far higher than on con­ven­tional mort­gages but have fallen steadily fol­low­ing the Bank of Eng­land’s cut to the of­fi­cial in­ter­est rate in Au­gust last year. In 2012 the typ­i­cal loan rate for a 70-year-old was around 6pc, ac­cord­ing to Key Re­tire­ment, and is now just 4pc. At the lat­ter rates, debts will dou­ble in 20 years – at 6pc it would take 10. Th­ese fig­ures are based on com­pound­ing the in­ter­est.

Lenders have also added fea­tures that al­low bor­row­ers to pro­tect their fam­ily’s in­her­i­tance by “ring-fenc­ing” eq­uity or pay­ing the in­ter­est dur­ing their life­time, which pre­vents the loan from es­ca­lat­ing.

Pay­ing for home ren­o­va­tion is still the most com­mon use of funds re­leased from life­time mort­gages, ac­cord­ing to the Eq­uity Re­lease Coun­cil, but lenders say it is be­com­ing more pop­u­lar to use the cash re­leased to help chil­dren on to the prop­erty lad­der.

A spokesman for Aviva, one of Bri­tain’s big­gest lenders, said: “We are see­ing larger sums of money be­ing ac­cessed in in­di­vid­ual cases, which is likely to be a re­flec­tion of the in­creas­ing num­ber of uses peo­ple have for re­leased eq­uity, such as help­ing both them­selves and fam­ily and for ef­fi­cient in­her­i­tance tax plan­ning.”

An­other pop­u­lar use of eq­uity re­lease is to clear out­stand­ing mort­gage debt as peo­ple en­ter re­tire­ment. For many, down­siz­ing may still be the best op­tion (see box, right). Since Roger Ward re­tired he has been look­ing at var­i­ous ways to help his only son on to the prop­erty lad­der in an ex­pen­sive part of north Lon­don.

Mr Ward, 70, who ran a se­ries of restau­rants af­ter a high-pro­file ca­reer in higher ed­u­ca­tion, wasn’t con­vinced by eq­uity re­lease when he first looked at the idea sev­eral years ago.

The plan was to down­size from his £2m home in High­gate, north Lon­don, pay­ing off the out­stand­ing £1m in­ter­est-only loan. He also wanted to help his son put down a de­posit on a flat nearby. On his teacher’s salary, the 24-year-old would strug­gle to buy any­where in the cap­i­tal, where the av­er­age prop­erty value is nearly £500,000, with­out sub­stan­tial help from his par­ents.

“A few years ago I looked at the

‘I was most wor­ried about the ob­vi­ous is­sue of com­pound in­ter­est’

Roger Ward, 70, down­sized and then took out a life­time mort­gage to help his son buy a flat in north Lon­don

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