Equity Release Retirement Income
Eddie and Yvonne were due to retire and start receiving their pensions in 2025. As a result of the Covid-19 pandemic, their employment and household income were affected. Furthermore, their outlook on life had changed. With sons living in Canada and Australia whom they got to see once a year, Eddie and Yvonne contacted us, curious about what options would be available if they decided to release some of the equity in their home to replace their current income and stop working a few years early.
A recent article from Legal & General suggests that the gap between those who can and those who cannot afford to retire as a result of the pandemic is growing.
For Eddie and Yvonne, they wanted to find out if they could replace their employed income over the next three years by arranging a drawdown lifetime mortgage now. This would give them the chance to stop working early and spend more time with their children and grandchildren on the opposite sides of the world. They knew they would both receive their state pensions in 2025, and Eddie had a company pension that was also due to start paying out at the same time.
Our advice to them was to arrange for a drawdown lifetime mortgage, which would give them access to their equivalent annual salaries over the next three years. The idea being that they would receive an initial tax-free lump sum on the day that the mortgage started, and they could then go back to the provider on the anniversary each year and draw down the same amount each year until they were able to access their pensions. The benefit of the drawdown option is that they would only be paying interest on the borrowed money once they physically had the money in their bank account. The funds that remained in the drawdown facility would be available, but it would not be accruing interest until Eddie and Yvonne drew it down into their bank account.
In 2025, Eddie will be able to access a tax-free lump sum from his pension, and he plans to use some of this money to repay the lifetime mortgage in full. Whilst the provider does not require Eddie to repay the loan until he and Yvonne have either passed away or moved into long-term care, the choice is theirs to make. Early repayment charges need to be taken into consideration when repaying a lifetime mortgage, and these need to be factored into the long-term plan. With this in mind, we arranged a drawdown plan with a provider that offered fixed early repayment charges over an eight-year period (the shortest timeframe currently available on the market). If Eddie and Yvonne decide to repay the loan in full in three years’ time, they know before they even receive the initial lump sum what the charge will be. Based on this, they may decide to wait until year 9 and then repay the loan in full; however, the choice is theirs to make!
If the pandemic and recent economic turmoil has disrupted your retirement plans and you think equity release may be an option for you, we are more than happy to have a chat, explain the pros and cons, and work on a solution with you.
