Using Equity Release loan to buy a cash annuity?

singsingsing74

Does it make sense to use a lump sum from an Equity release loan buy an annuity?

I had been thinking of enhancing my rather low annual income using the drawdown ER process, but my brother believes that it is better to put the ER lump sum into an annuity, thereby giving a definite annual income. I need to have about £6k per annum.

He is aware that the compound interest on the 50k, affecting the equity on my house, will over say 10 to 15 years mount up more than a smaller lump sum now -to top up savings - plus more small sums annually on drawdown. In fact, in order to both top up my dwindling savings and cover buying an annuity that will generate £6k, I'd nee an initial ER lump sum of £70k.

I am not getting my head round why he so strongly believes the annuity route is better. Has anyone any thoughts to offer on this?

I am 78 by the way.  

Linton

In principle it makes sense to me to consider using ER to buy  an annuity as at 78 annuity rates are high and the income would be guaranteed for life. Leaving a valuable house after your death could be seen as a waste of assets if you have a better use for the money whilst alive.

However whether it is right for you I don’t know. For example there is the effect on benefits and payment of care home fees.  It could reduce your flexibility in the future if frailty makes it impossible to stay where you are. Are you the sole owner of the house? Are you in good health? Is inheritance after your death an issue? What are your other options? Rhetorical questions, not to be answered.

It may be useful to discuss your financial position with an IFA. You may need one anyway as I don't know if f providers of purchased life annuities (ie an annuity bought outside a pension) deal directly with the public.

Also note that the annuity rate you get may be lower than those you see advertised since the figures apply to pension annuities rather than PLAs for which the market is less competitive. On the plus side they are subject to a lower tax rate since much of the income is treated as repayment of the initial cost which is not taxable.