Are you home and dry in the twilight years if you part-sell the house?

Hard-pressed retirees can use equity release to top up their income. But their children must have a say, writes Esther Shaw. Their inheritance is at stake
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The Independent Online

Ahouse holds the secret to a comfortable old age. That, at least, is the hope of many people in or close to retirement. Through equity- release schemes, they are relying on the value of their homes to provide enough money to supplement inadequate pension provision and cover the cost of any long-term care needs. They may also now be looking to clear debts that have followed them into retirement and, with savings rates at an all-time low, to boost income.

But as equity release could significantly reduce the worth of the estate left to their children, it is crucial family members play a part in the decision-making process.

Encouraging new findings from equity-release adviser Key Retirement Solutions show that 80 per cent of those with children do involve them at some point. However, Key also found that in 2008 a third of people were specifically withdrawing money for the benefit of family members. "Anecdotal evidence suggests the current economic climate is triggering more parents to want to help their children, who may be struggling more than usual," says Key's Dean Mirfin. Even in these cases, he says, the beneficiaries should think things through as there will be an impact on the size of their inheritance."

An equity-release plan enables homeowners aged over 55 to unlock the capital held in their homes while continuing to live there. The schemes come in two forms, the most popular being the lifetime mortgage, where a loan is taken out against part of the property and paid as a lump sum or monthly income. There are no regular repayments and the loan is not settled until you die or go into a care home. At this stage, the house is sold and the capital and interest are repaid.

With a reversion plan, you sell a percentage of your home in return for a cash lump sum. The provider then receives its agreed share of the proceeds when the property is sold.

While equity release earned a poor reputation from mis-selling scandals in the late 1980s, the rules have been tightened since then. All plans are now regulated by the City watchdog, the Financial Services Authority.

However, this is not a decision to take lightly, and independent financial and legal advice is essential before committing to any plan. "Normally, with these schemes, the debt is only repaid when the home is sold, by which time there could be no equity left in the property to leave to your dependants," warns David Kuo from personal finance website Fool.co.uk. "It's vital you keep your children informed."

Melanie Bien from mortgage broker Savills Private Finance adds that the schemes can often be complex and difficult to understand. "Parents may be elderly and confused when they are considering equity release, so it's important they take family members along when discussing the options with a financial adviser."

Children also need to understand why their parents are considering equity release. After all, it can be expensive and it is not risk-free. Mr Mirfin recommends asking questions such as, will my relative's state benefits be affected? Could the plan leave debts for the family? And what happens if my relative wants to move house?

"Your adviser will be able to find out any effect on means-tested state benefits," he says. "And by signing up to a plan approved by industry body Safe Home Income Plans [Ship], you get a 'no negative equity' guarantee, so the amount owed will never be more than the property value, and the option to move house."

Children will also want to find out how a plan might affect their inheritance. "While equity release will reduce the value of an estate," says Mr Mirfin, "there are schemes available that would let your relative guarantee an inheritance if they wish."

For example, some plans allow for the ring-fencing of part of the home, so the loan is never secured against it. "If your property is worth, say, £200,000, you could tell your equity- release provider that you want to protect 25 per cent of the value as an inheritance for your children," Mr Mirfin says. "When you are advanced the initial loan, the provider will discount the property value by that 25 per cent at the outset, and treat the home as though it were worth £150,000. You can generally protect up to 50 per cent of the property value in this way."

The flipside is that the advance from the lender will be smaller.

Another approach is to give away part of the cash secured under the equity-release arrangement. In effect, loved ones get their inheritance early.

Louise Cuming from price-comparison service Moneysupermarket.com adds that, in many cases, children want their relatives to be selfish and enjoy retirement without financial worries. "But parents still have a strong desire that their assets are not lost when they die but passed on to their children."

She warns that the sector, which has not been immune to the financial turmoil, could be hit still further in 2009. "Falling house values will make lenders increasingly cautious, and we could see them lowering loan-to-values and imposing higher age criteria before considering applications. This, in turn, could make the product less attractive, as the amount of equity available for release drops."

There are alternatives to equity release. First, you should ensure you are maximising the returns from any pensions, savings and stock market investments. Also check you are claiming all the benefits you are entitled to.

"And consider options such as selling the property and downsizing to release cash to live off," says Ms Bien.

"The issues of affordable retirement and long-term care will be more pressing as we live longer and pension provision becomes more inadequate," says Ms Cuming. "The answer is early financial planning, and for children to support their parents through this."

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