Questions of Cash: How can my parents release their equity?


Q. My retired parents want to release capital from their house through an equity-release policy. I am suspicious of these and have suggested I take out a mortgage on their property and give them the money. Is this wise?


IS, by e-mail

Q. My retired parents want to release capital from their house through an equity-release policy. I am suspicious of these and have suggested I take out a mortgage on their property and give them the money. Is this wise?
IS, by e-mail

A. There are concerns at the weak regulation of some equity-release products and you should only use reputable advisers and providers, who should be members of Safe Home Income Plans. But Ray Boulger of the mortgage adviser Charcol says: "Providing you choose the right scheme there is no need to worry. But interest rates on equity release schemes are higher [than on a standard mortgage]. So if you have funds it could be financed more cheaply and with more flexibility if you arrange it."

Stephen Pallister, tax partner at Charles Russell solicitors, suggests you consider whether to buy a share in your parents' home. You would then benefit from a share of any increase in the value of the property. But stamp duty would be payable on the purchase unless it is below the £60,000 threshold. If you do not live with your parents, you would pay capital gains tax on any increase in the value of your share when the property is sold. Whether your parents opt for an equity-release scheme or a loan/purchase from you, this reduces the value of the estate for inheritance tax.

Q. I am 56 and have paid into my company's final salary pension scheme for 32 years. As I will have accumulated only 26 years by retirement, I have been buying added years in the scheme. But the current state of the fund means I will not be able to draw all my entitlement at retirement. Before I began buying added years I paid into a free standing AVC [additional volun-tary contributions]. Given the state of my employer's scheme it seems sensible not to put more money into it now. Should I restart payments into my FSAVC?
MB, Chester.

A. Simon Creeber of the financial adviser Vale Insurance Services says: "I would favour an Isa. Whilst you will not receive instant tax relief, you will have the option to take all the fund tax-free at retirement or draw a tax-free income. You will even have the option to use the accumulated fund to make a further pension contribution when you retire, if that is appropriate." You can also consult the Occupational Pensions Advisory Service on 0845 601 2923.

Q. The bonuses on my with-profits endowment policy with London Life, which I took out in 1983, have taken a severe knock. The latest bonuses have dropped from 2.5 per cent last year, to 0.5 per cent this year. This is in a period of strong stock exchange performance. London Life has provided no explanation. Is the company going bust? Is my policy safe?
JM, Edinburgh.

A. Some with-profits funds have declared nil bonuses this year, so your problem is not unique. London Life is part of the HHG group - which also owns Pearl and Henderson - and should not be at risk of bankruptcy. The life insurance analyst Ned Cazelet says: "We don't see it as going insolvent, though the solvency position is not good." The impact of this is that while your policy should be safe, the company is unlikely to pay good bonuses for the forseeable future. Mr Cazelet points out that the fund has a very low exposure to equities, so you will not benefit from strong stock exchange performance.

Above all, you must ensure you have taken sufficient action to give you confidence you can repay your mortgage, which is likely to involve you either setting up a repayment mortgage alongside your endowment, or providing an alternative and more reliable form of investment. Ben Yearsley, investment manager at the adviser Hargreaves Lansdown, says: "You have to question whether people should continue paying into products like these. They might put the money into another financial product if they can do so. It does depend on the MVA [market vale adjustment, the penalty for surrendering the endowment], but even paying an MVA might be worth it. You will still need life cover, which can be expensive to replace. These things are never clear cut." You should take specific financial advice.

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