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Should you take equity release to pay off your children’s mortgage?
Derin Clark

Derin Clark

Online Reporter
Published: 10/09/2021

Rising house prices has resulted in some older homeowners unlocking the equity they have built up within their own property to gift house deposits to their children via equity release, but for those with children who already own their own home, is it is good idea to take equity release to pay off their mortgage?

A key benefit to parents gifting their children their inheritance early to pay off their mortgage early is that it will likely free up a substantial chunk of their monthly outgoings and the money can be used towards creating a more financially secure future instead, for example by increasing their pension savings or investing.

In fact, recent research by equity release advisors Key found that 1.7 million inheritors used the money to pay off their mortgage. Although Key revealed that the average age people inherit is 47, it also found that 29% of those receiving an inheritance do not do some until they are aged 65 to 74; by which most homeowners have repaid their mortgage.

As such, many parents might be tempted to gift their children their inheritance early so that it cannot only help towards their children’s future, but will also enable them to see their children benefit from the money. As Will Hale, CEO at Key, explained: “The idea of inheritance arguably works best when the person receives the support at a time in their life when it can do the most good for their long-term financial security. However, with the average age of inheritance sitting at 47 years old – when people are more likely to have built up assets – we are seeing more conversations happening about providing people with a ‘pre-inheritance’.

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Triple lock suspended but pensions will still rise

Today the Government announced that the triple lock will be suspended for one year, however state pension will still rise next year by 2.5% or in line with inflation.

Making an announcement in the House of Commons Work and Pensions Secretary Therese Coffey, announced that a Social Security Uprating and Benefits Bill would be introduced for 2022-23 which will result in the basic and new state pensions increasing by 2.5% or in line with inflation.

The announcement of the new Bill means that the triple lock - which sees the state pension rising by either inflation, average earning growth between May and July, or by 2.5% - being suspended for one year. Due to the post-pandemic rise in average wages, if the triple lock had been kept this year it would have seen the state pension increasing by 8%.

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How does equity release affect inheritance?

Equity release can be a good way for older homeowners to tap into the wealth they have built up within their homes, but many considering this option will have concerns on how it will impact the inheritance they leave behind. To help homeowners get a clearer understanding of the impact of equity release on what they leave behind, here we look at how equity release affects inheritance.

The biggest impact equity release has on inheritance is that it will reduce the amount inherited by loved ones when the property is sold after the equity release borrower has gone into permanent care or died. Not only does the sale of the property need to cover the amount of equity release taken out, usually between 20 to 60% of the property’s equity, but also repay the interest that has accrued on the equity release loan. As soon as money is taken out through equity release interest starts to be added, this means that someone who takes equity release at 55 will likely leave behind a smaller inheritance than someone who waits until later in life to take equity release.

Saying this, rising house prices can help to mitigate some of the impact the equity release loan and interest has on the inheritance left behind. As well as this, many equity release plans now allow borrowers to make partial repayments or interest repayments during their lifetime, which again can reduce the impact on inheritance. Another factor to consider is that it is common for equity release plans to now allow drawdown, which means that borrowers can take out lump sums of money as and when they require, with interest only being added once the money is taken (or drawn down).

Furthermore, a no negative equity guarantee clause, guarantees that no more than the outstanding value of the home will have to be used to pay the equity release debt, which means that inheritors will not be left with additional equity release debt once the property is sold.

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Annuity incomes rise

Consumers looking for a secure retirement income gained from an annuity will be pleased to see that the average annuity has increased by 1.4% between April and June this year, compared to 0.7% growth the previous year.

Although annuities began to fall in popularity after pension freedom rules were introduced in 2015 allowing all retirees to take pension drawdown for the first time, those wanting a secure retirement income continue to opt for an annuity.

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Consumers may need more than pension savings when planning for retirement

Workers today will have lower pension income on average than some earlier generations a report from the Equity Release Council has found, which means that in the future retirees will likely need more than just their pension savings to boost their retirement incomes.

Even those looking to retire in the near future may find that changing jobs multiple times and not starting a pension fund until later in their career, as well as the move away from generous defined benefit pensions to defined contribution schemes, has resulted in workers having less money in their pension pots compared to the previous generation.

Add to this the recent economic turmoil caused by the global pandemic that has seen the Bank of England base rate cut to an all-time low of 0.1% and stock market volatility, even those who have managed to save a good pension pot may find they have less than they initially anticipated.
As such, when planning for retirement it may be a good idea to consider boosting pension incomes through alternatives rather than just relying on pension savings.

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Recent News

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The best lifetime mortgage rates available during August 2021

24th August 2021

Earlier in the month, we reported that equity release deals on the market has more than doubled in just two years

Earlier in the month, we reported that equity release deals on the market has more than doubled in just two years

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Why you need to plan when taking tax-free pension drawdown

20th August 2021

Retirees planning to fund their retirement through pension drawdown may be tempted to take the full 25% tax-free drawdown in one lump sum, but for many pensioners it may be a better option to think more strategically about how they release their pension savings

Retirees planning to fund their retirement through pension drawdown may be tempted to take the full 25% tax-free drawdown

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How to pay off debt in retirement

11th August 2021

Growing optimism about the economy, combined with some older consumers continuing to feel the impact of the pandemic on their finances

Growing optimism about the economy, combined with some older consumers continuing to feel the impact of the pandemic on their finances

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Number of equity release deals more than double

9th August 2021

The number of equity release deals on the market has more than doubled in just two years as lenders offer more choice and flexibility to borrowers

The number of equity release deals on the market has more than doubled in just two years as lenders offer more choice and flexibility to borrowers

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Most Popular Retirement News

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Should you take equity release to pay off your children’s mortgage?

10th September 2021

Rising house prices has resulted in some older homeowners unlocking the equity they have built up within their own property to gift house deposits to their children via equity release

Rising house prices has resulted in some older homeowners unlocking the equity they have built up within their own property to gift house deposits to their children via equity release

Read More
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Triple lock suspended but pensions will still rise

7th September 2021

Today the Government announced that the triple lock will be suspended for one year, however state pension will still rise next year by 2.5% or in line with inflation

Today the Government announced that the triple lock will be suspended for one year, however state pension will still rise next year

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Pensioners need a £33,000 a year income to enjoy a comfortable retirement

17th October 2019

In order for workers to enjoy a comfortable retirement that includes holidays abroad, a generous clothing allowance and a car they will need to have saved enough for a £33,000 per year income

In order for workers to enjoy a comfortable retirement they will need to have saved enough for a £33,000 per year income

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Equity release rates are now lower than at the start of 2020

3rd September 2020

The average rate for equity release dropped to 4.21% on 3 September 2020, only fractionally above the lowest ever average rate seen since 2007, at 4.13% in March 2020. Those wanting to release cash tax-free from their home to help fund retirement or for home improvements can now do so at competitive rates.

The average rate for equity release dropped to 4.21% on 3 September 2020, only fractionally above the lowest ever average rate seen since 2007, at 4.13% in Marc

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