How to live off the house that you live in

Many older people have inadequate incomes with thousands tied up in their homes. Richard Phillips investigates how to release it
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Indy Lifestyle Online
Retirement can be a time of great financial concern, especially for those who find themselves reliant on a small occupational pension or state provision alone.

Many older people, brought up in the certainties of the fifties and sixties and the promise of cradle to the grave care, also feel bitterly let down when faced by the paucity of income they receive on retirement.

Yet many of these people are sitting on considerable wealth in the form of their property. One in two pensioners now own their own home. The problem comes in trying to find a way to realise some of that wealth.

A flurry of schemes in the late 1980s ran foul of the authorities when the investment annuities offered failed to provide the targeted returns, and the stink they left in their wake is only gradually diminishing.

It has always been possible to raise a lump sum from the bank against your home. Banks are, however, often chary about advancing more than a small sum, and this is often available only to people who they believe to be close to death. Anyone under 70 is unlikely to be considered.

If you choose to go down this route, the borrower then assumes several risks. Interest rates may go up and house prices in general or the value of your individual property may fall. You also have to ask yourself whether you really want the hassle of a mortgage in your seventies.

Other than borrowing money against the house, there are a handful of companies specialising in what have come to be known as home income plans. These are where the retiree is sold an annuity in return for releasing some or all of the equity to the specialist company.

Of these, one company specialises in providing just a lump sum, or a stream of lump sums. Home & Capital Trust was set up in the late 1970s by John Inskip and is modelled on the French en viager, a speculative custom where an elderly proprietor can sell his or her property to an investor, who pays them a regular monthly income in return. The investor takes over the property on the death of the previous owner and usually sells it.

The gamble here is clear: if you live longer than expected, the investor may have to stump up more than the property is worth - which is just what happened in the case of Jeanne Calment, the world's oldest woman. The 122-year-old outlived the solicitor who bought the title to her property from her in 1965. He died, aged 77, in 1995, whereupon the property reverted to Mrs Calment.

Alternatively of course, if you die soon after the deal is struck, then the investor gets the better bargain.

None of the schemes available in the UK have this element of risk, to either investor or vendor. Home & Capital Trust pays the seller a lump sum based on the current market value of the home. If the seller lives longer than expected, the investor, who buys all or some of the house, loses out, but there is no compensation, at least financially, to the seller.

Because Home & Capital pays out only lump sums, the money is not subject to income tax, which an annuity can be.

How do these schemes make money for the investor? In the case of Home & Capital, it takes a straight 1 per cent fee from the seller. It also charges the investor an annual management fee.

Beware though; the lump sums you can obtain will be far less than the present value of the property. For example: a couple, both aged 70, own their home worth pounds 100,00. If they sell the entire value, Home & Capital will pay them pounds 37,960. Or they could opt for an initial payment of pounds 18,980, followed up by seven annual payments of pounds 3,522, or pounds 24,654, to make a slightly larger total of pounds 43,634.

The low pay-out is because the investor is effectively charging about 7 per cent for the money - roughly the equivalent of a mortgage. Given the magic of compound interest, an annual rate of 7 per cent is equivalent to a little over pounds 98,000 if spread over 13 years - the average life expectancy of a couple of this age. The investor also stands to gain from any capital appreciation in the value of the property - or lose, if the value falls.

Mark King, a partner in the business, says that the aim is "to be completely fair to our customers". He says most customers are delighted with the benefits a lump sum brings.

If you want to investigate home income plans, make sure any company you talk to is a member of Ship - the Safe Home Income Plans company. Its members are Allchurches Life (01452 526265), Carlyle Life (01222 371725), Home & Capital Trust (01234 340511), and Stalwart Assurance (01306 876581).

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