Equity Release / Annuity / alternatives?

Cazza

Looking for a bit of help & guidance, please. My Mum passed away last week and I'm helping Dad organise himself going forward. Dad is late 70s but physically well and mentally capable. He still works part time / self employed in the financial sector. 

He and my Mum owned their home outright, value c£500k. Dad has some balances on credit cards. The majority of his monthly income is / was via pensions & benefits my Mum received, these will now cease and he will have a shortfall in his income. He will not entertain the idea of downsizing. 

I need to help him make plans for an income going forward. We think either an Interest Only mortgage (his idea) or Equity Release plan and using the lump sum to purchase an annuity (my idea) are our starting points. My plan for the next few days it to work out with Dad the amount of income he no longer has and to look at his outgoings so we can work out what he needs on an ongoing basis, to then allow us to work backwards with the right adviser as to how to achieve what he needs.. I'm starting to look up advisers via Unbiased... are there alternatives / other options we've not considered? I used to work in the mortgage industry pre-2008 and am still in the financial sector but this isn't an area I'm familiar with.  

Linton

Equity release and an annuity does make sense in my view as both provide much better deals at his age then when younger.  For either you would need to talk to an advisor.  Perhaps you can find an IFA who can handle both.  So I think you are on the right track. 

However it could be prudent to set his expectations of what  ER+annuity could provide before you work out what expenditure he needs to support.  You can estimate what equity could be released and annuity rates from data on the net.  For example I see from the Aviva calculator that he could release £225,000 and that annuity rates for a fixed rate annuity for a 75 year old are about £6K/£100K which gives £13.5K/year +SP.

I dont see any point in an IO mortgage - he could live for another 20 years during which the interest on its own, never mind his expenditure, would use up a significant amount of his money. Better if a pension company takes the risk of extreme old age.

TVAS

I hope you can see the point of having a pension that pays to the surviving spouse on the death of the first spouse. 

Not entertaining the idea of downsizing I suppose it depend where one lives. I live in Hove so if I downsized it would be a 1 bed flat which I would rather sell myself to the devil than the self harm of a leasehold flat.  
Just be prepared that the roll up interest could mean on death there is no equity left for his estate due to the roll up of interest. There are lots of equity release plans some you can repay monthly, ad hoc lump sums but I suspect the interest rates that will be offered will be higher than a standard mortgage. 

xylophone

https://www.telegraph.co.uk/financial-services/retirement-solutions/equity-release-service/who-are-equity-release-council/

https://www.moneyadviceservice.org.uk/en/articles/equity-release

https://www.equityreleasesupermarket.com/videos-and-guides?gclid=EAIaIQobChMInYzGitaS7wIVi57tCh3KYwIZEAAYASAAEgKyI_D_BwE&gclsrc=aw.ds

Above may provide a starting point.

Cazza

Thank you all for the advice, it's reassuring to know we are barking up the right tree.

Linton - those figures are in the ballpark of what we'd hoped to achieve. Potentially we'll need to release slightly more equity than we'd initially thought but that's not an issue with a no negative equity guarantee . I agree with your point re the IO mortgage and that is a concern I'd expressed to Dad already, he is starting to reconsider.

TVAS - I agree with your point re the pension being paid to the surviving spose, Mum's pension was Occupational so the rules of the scheme she joined were predetermined. As it happens it does sound as though there may be a very small Widower's pension payable, we are waiting to hear regarding this. Downsizing would, in my opinion, be the best route. The house is a large, detached family property (in a similar part of the world to Hove!) but the window of opportunity for doing this passed about 10 years ago, there's been too much water under the bridge emotionally for Dad now. Regarding equity in the estate, my goal is to ensure Dad is happy, comfortable and secure.

Malthusian

Cazza said:

TVAS - I agree with your point re the pension being paid to the surviving spose, Mum's pension was Occupational so the rules of the scheme she joined were predetermined. As it happens it does sound as though there may be a very small Widower's pension payable, we are waiting to hear regarding this. 

It would be unusual for an occupational pension to provide a "very small" widower's pension (unless it was very small in the first place). 50% is standard. Private pension annuities are more likely to cease completely without widower's benefits.

The issue of an equity release loan snowballing with compound interest does not just affect inheritance; it would also reduce the funds available if Dad later decided he did want to downsize after all, or had to move into care.

If he's still physically and mentally active to the point he's working in finance, there is every possibility that he might later decide that the emotional value of the house doesn't actually outweigh the inconvenience / maintenance issues / unused space of staying in a large detached house. How he feels in the immediate aftermath of his wife's death may be very different to how he feels in a year or five years.

This is a classic case of when it is a bad idea to rush into anything. Recent major traumatic life event + perceived need based mainly on "he won't consider" instead of "he considers" + massively expensive financial product = recipe for a bad decision.

Have you considered loaning him the money yourself, secured against his house, to be eventually repaid from his estate?

Albermarle

Good advice above . Maybe in a few months time , when the sun is shining , you could have a look around with him at possible local areas with smaller properties, to start to maybe get him more comfortable with the idea of moving . Like TVAS says , flats have their own issues , but a small house /bungalow with a small garden could be a good move.

Kynthia

Malthusian said:

Cazza said:

TVAS - I agree with your point re the pension being paid to the surviving spose, Mum's pension was Occupational so the rules of the scheme she joined were predetermined. As it happens it does sound as though there may be a very small Widower's pension payable, we are waiting to hear regarding this. 

It would be unusual for an occupational pension to provide a "very small" widower's pension (unless it was very small in the first place). 50% is standard. Private pension annuities are more likely to cease completely without widower's benefits.

The issue of an equity release loan snowballing with compound interest does not just affect inheritance; it would also reduce the funds available if Dad later decided he did want to downsize after all, or had to move into care.

If he's still physically and mentally active to the point he's working in finance, there is every possibility that he might later decide that the emotional value of the house doesn't actually outweigh the inconvenience / maintenance issues / unused space of staying in a large detached house. How he feels in the immediate aftermath of his wife's death may be very different to how he feels in a year or five years.

This is a classic case of when it is a bad idea to rush into anything. Recent major traumatic life event + perceived need based mainly on "he won't consider" instead of "he considers" + massively expensive financial product = recipe for a bad decision.

Have you considered loaning him the money yourself, secured against his house, to be eventually repaid from his estate?

I was very surprised to learn that it was less than 33 years ago the civil service pension scheme allowed for a widower's pension to start being built up. So i think any membership in the scheme before July 1987 doesn't pay anything to a widower. That makes it entirely possible for there to be people today left without much of a survivors pension especially if the wife didn't work to the scheme pension age of 60.

ukdw

I would recommend having a listen to the "Maven Money" podcast, equity release episode (160) which I found quite eye opening.

Whilst it does provide a level of certainty, If your father does go for the lump sum equity release/annuity option then depending on interest and annuity rates he may well find that the compounding accumulating interest within the equity release mortgage ends up being a fair bit larger than the annuity income which could limit downsizing options in the future.

Personally in his position I would much prefer to go for the much more flexible lifetime mortgage drawdown type option - where interest only accumulates on the annual withdrawals.

Another thing to watch out for is how much creating an annuity income could end up resulting in loss of benefits such as pension credits which he may now be entitled to.

barnstar2077

If the home is owned outright and he is working part time while in receipt of a state pension then it may not even be necessary to provide additional income.  I would concentrate on a deep dive of monthly expenses and only look at alternatives if that doesn't prove fruitful.  I would not involve a financial advisor until you are pretty certain that you need to. 

Silvertabby

Kynthia said:

Malthusian said:

Cazza said:

TVAS - I agree with your point re the pension being paid to the surviving spose, Mum's pension was Occupational so the rules of the scheme she joined were predetermined. As it happens it does sound as though there may be a very small Widower's pension payable, we are waiting to hear regarding this. 

It would be unusual for an occupational pension to provide a "very small" widower's pension (unless it was very small in the first place). 50% is standard. Private pension annuities are more likely to cease completely without widower's benefits.

The issue of an equity release loan snowballing with compound interest does not just affect inheritance; it would also reduce the funds available if Dad later decided he did want to downsize after all, or had to move into care.

If he's still physically and mentally active to the point he's working in finance, there is every possibility that he might later decide that the emotional value of the house doesn't actually outweigh the inconvenience / maintenance issues / unused space of staying in a large detached house. How he feels in the immediate aftermath of his wife's death may be very different to how he feels in a year or five years.

This is a classic case of when it is a bad idea to rush into anything. Recent major traumatic life event + perceived need based mainly on "he won't consider" instead of "he considers" + massively expensive financial product = recipe for a bad decision.

Have you considered loaning him the money yourself, secured against his house, to be eventually repaid from his estate?

I was very surprised to learn that it was less than 33 years ago the civil service pension scheme allowed for a widower's pension to start being built up. So i think any membership in the scheme before July 1987 doesn't pay anything to a widower. That makes it entirely possible for there to be people today left without much of a survivors pension especially if the wife didn't work to the scheme pension age of 60.

Applies to all of the public sector, and probably some private DB  schemes as well.

Pre 1988, there was no automatic widower's pension provision, as it was assumed that married women only worked for a few years/part time and that their breadwinner husbands had their own pensions.  Single women didn't need the added benefit of a widower's pension.

This changed in 1988, but was not made retrospective - only service going forwards was on widower's pension earning terms.  However, women could convert all of their service by paying the higher contributions needed - either in monthly payments while still working, or by a lump sum taken from their pension benefits on retirement.  If the LGPS is anything to go by, then very few women opted to do this, presumably because of the cost.

Changed again in the mid 1990s, making all service liable for widower's pension benefits, but only for those who were still active, contributing, members of the schemes.  Those who were already retired/deferred were stuck with the earlier rules.

And the post 1988 service only, regardless of date of leaving/deferment, still applies in the case of post retirement marriages.  That one in particular is still catching people out.