Retirement Money News

Lifetime mortgages are growing in popularity as the Equity Release Council reported this month that more homeowners are using property wealth to top-up pensions and to provide a living inheritance to children and grandchildren.

“UK households are converting unprecedented amounts of mortgage borrowing into property wealth as we look to move on from the worst of the pandemic,” explained David Burrowes, chairman of the Equity Release Council. “Combined with property price rises fuelled by the Stamp Duty holiday, homeowners have record equity to potentially draw upon in later life.”

To help homeowners decide whether a lifetime mortgage is right for them, below we’ve highlighted some of the most competitive rates available this month.

Borrowing using a lifetime mortgage, a type of equity release has steadily increased during the first six months of 2021 with more than 35,000 borrowers unlocking £2.3bn of cash from their homes. The Equity Release Council, the trade body representing lifetime mortgage lenders believes more of us are using property wealth to top up pensions and to provide living inheritances to children and grandchildren. They put this down to a mindset change of consumers that now have access to more flexible lifetime mortgages at lower interest rates than previous years.

Some retirees will also have found their estates are now above the £325,000 inheritance tax limit due to rising house prices this year. The debt from a lifetime mortgage is deducted from the value of the estate and it isn’t liable itself for IHT. While this may be an efficient approach to reduce a potential future tax liability, cash gifts above £325,000 made in the seven years before your death will see the excess still liable for IHT. (The maximum cash gift without incurring IHT per tax year is £3,000.) Find out more about tax and equity release in our guide.

Commenting on the latest research, David Burrowes, chairman of the Equity Release Council, said: “UK households are converting unprecedented amounts of mortgage borrowing into property wealth as we look to move on from the worst of the pandemic. Combined with property price rises fuelled by the Stamp Duty holiday, homeowners have record equity to potentially draw upon in later life.

“The transformation of later life mortgages in recent years has given people more opportunities to access their biggest source of wealth. We are seeing mindsets change to the point that tapping into property wealth is now a common consideration to meet various retirement needs, from topping up pension income to providing a ‘living inheritance’ via gifting to younger generations.”

“The modern equity release market has shown resilience in the face of uncertainty to climb back towards pre-pandemic levels. The disruption of the last 18 months has not slowed the pace of innovation in lifetime lending, and it is important the market continues to evolve to address the financial challenges people will face in the post-pandemic world.”

The best within the investment, life and pension sector were recognised at the 2021 Investment Life & Pensions Moneyfacts Awards, which took place at a glittering ceremony in London.

The awards evening was hosted by comedian Lloyd Griffith and gave out awards to recognise the best companies within the industry.

Winners on the night included Aviva, which won Best Personal Pension Provider, Best Term Assurance Provider and Best Claims Support; Curtis Banks, which won Best SIPP Provider; and Whitehall Group, which won Best SSAS Provider and Service Beyond the Call of Duty. A full list of award winners can be found here.

Commenting on the awards, Lee Tillcock, Managing Editor of Investment Life & Pensions Moneyfacts, said: “COVID-19 caused consumers, brokers and providers to re-evaluate the ways in which they undertook their working lives. Against this backdrop, the finalists and eventual winners at this year’s awards should be rightly proud of their achievements and have offered a range of products and services that have best supported the sector, at a time when its success and growth remain so crucial.

“We were greatly impressed with the level of commitment shown and the upbeat comments given by service providers and brokers. There is little doubt that the levels of choice and willingness to find real financial solutions continue to improve and combined with the continuing success of the roadmap out of lockdown provides a real sense of optimism.”

The minimum age to drawdown a personal pension in the UK is increasing to 57 on 6 April 2028. Right now, UK pension savers can access their personal pensions from aged 55 and this is consistent across defined contribution schemes, workplace scheme and private pensions. The decision to increase the minimum age to access a personal pension, also called the Normal Minimum Pension Age (NMPA) was based on increasing life expectancies and to keep this at ten years prior to State Pension Age.

The Government is now consulting on the best way to manage this change and this has led to calls from the insurance trade body, The Association of British Insurers (ABI) for a simpler approach. The Government proposal sets out to give those with a defined contribution pension ‘protected’ status, meaning they can still access their pension at 55. Protected status under the consultation includes public service pension schemes and all UK registered pensions schemes where a protected pension age is held.

The ABI argues that varying ages to access different pensions will cause more confusion in an already ‘complicated UK pension system’ and that this may skew pension savers and advisers’ decision making. The insurance trade body states that it is not often apparent if a pension pot has a protected status or not and that pension scheme rules, and wording could be ambiguous on this point. This will make it difficult for pension savers and financial advisers to make clear decisions and recommendations. Pension savers may base decisions about their pension and retirement on the single issue of drawing down funds aged 55, for example, transferring funds to a protected scheme or opting out of workplace schemes and losing employer contributions as a result. These may solve an immediate problem but may not present the best financial outcome for the pension saver.

The last time the Government increased the NMPA was in 2010, rising from 50 to 55. Then, everyone’s minimum age changed except for a few limited cases, based on the pension saver’s employment, such as public and uniformed service workers.

Yvonne Braun, Director of Long-Term Savings Policy at the Association of British Insurers said:
“People are living and working for longer so it is right the minimum age you can access your pension will rise to 57 in 7 years’ time, in step with the state pension age rising to 67. Unfortunately, the Government’s proposed implementation maximises the complexity of this change and would create enormous confusion for pension savers.

“Millions would still be able to access their pension at age 55, making the change pointless. Most savers will also have multiple pots at different ages, complicating their retirement planning. The ability to access a protected pension age of 55 may drive advisers to recommend switching to their clients, creating arbitrary market distortions. Savers may also leave employer schemes with a Normal Minimum Pension Age of 57 to access their pension earlier elsewhere, losing the employer contribution.

“We urge the Government to rethink their approach and make it much simpler for consumers. Being able to access their pension at 57 from 2028 for the vast majority of people is clear, reduces complexity and poor outcomes, and simplifies planning for retirement.”

Jon Greer, head of retirement policy at Quilter:
“We support the ABI’s stance for greater simplicity in the uplift of the Normal Minimum Pension Age. If the government is certain it wants to proceed down the road of increasing the NMPA, then it would be better just to move everyone to 57 and do away with any proposed transitional protections. This will make the change easier to understand and will prevent introducing damaging and unnecessary complexity into important areas of pension policy, such as small pot consolidation; the pensions dashboards and simpler annual statements.

“The Government has given significant notice of the change, allowing people to plan accordingly without securing a protected pension age. At the point the legislation comes in people will have six years to adjust any plans they may have had and for the overwhelming majority, taking their pension fund at the earliest age possible will not be in their best interest. After all the purpose of pension saving is to provide money for later life.”