Equity Release Or Pension Drawdown? | moneyfacts.co.uk

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Derin Clark

Derin Clark

Online Reporter
Published: 18/02/2021

The pandemic has resulted in many households facing financial struggles over the past 12 months and older homeowners may be considering tapping into their pension pot early or releasing equity from their property to see them, or help loved ones, through the current economic uncertainty.

Although accessing pensions, via pension drawdown, or releasing equity from homes through equity release can be a good way to access wealth that has accumulated over lifetimes, both options can have a long-term impact on finances and need to be considered carefully before a decision is made.

Ideally, those considering pension drawdown or equity release should speak to an independent financial adviser to discuss their individual financial goals, but as a start we’ve looked at the pros and cons of both equity release and pension drawdown.

Is equity release the right option for you?

Equity release allows older people, usually those aged 55 and over, to borrow equity they own in their home through an equity release loan. The loan is secured against the property’s value and does not have to be repaid during the borrower’s lifetime, unless they move into a permanent care home or sell their home, and can be a good way for homeowners to tap into the wealth they have built up in their property without having to move home.

The downside to equity release is that interest is added to the loan, which can result in the loan and interest significantly impacting the inheritance the borrower leaves behind. For example, those who take out equity release when they are younger, for example, in their 50s and who live into their 90s could accumulate 40 years’ worth of interest.

In recent years there has been a significant increase in the number of equity release deals available on the market, which has helped reduce the average rate on equity release to record lows and also increased the flexibility of products. As such, deals that allow borrowers to take equity release as a drawdown, meaning they can borrow smaller amounts over time rather than taking a lump sum all in one go, are much more common now. Taking equity release as drawdown means that borrowers only accumulate interest on the amount they actually borrow rather than the full facility available to them, which can help to reduce the interest that accumulates over their lifetime. As well as this, there are also equity release deals that allow borrowers to repay interest during their lifetime and others that allow borrowers to repay parts of the loan. With so many flexible features available on equity release deals now, those considering this option will need to speak to an equity release broker to see what the best deal is for their circumstances.

Whatever type of equity release deal is chosen, borrowers should still be aware that it will likely have a long-term impact on their finances and, as such, it is a requirement before taking out equity release to speak to an independent financial adviser first.

Is pension drawdown the right option for you?

Another option available to those aged 55 or over is to access their pension pot through pension drawdown although this option is not available for those who have a defined benefit pension only The first 25% of the fund can be taken as a tax-free cash lump sum and after this, additional withdrawals will be taxable income. In order to take pension drawdown, the pension needs to be transferred to a drawdown plan and the provider may charge a fee when funds are withdrawn through drawdown. The remainder of the pension can continue to be invested, but as the value of the pension fund will fall due to funds being withdrawn, there is less potential for it to benefit from further investment growth. In addition to this, those who take money from their pension too early may risk running out of money later in life, especially if they live longer than expected or their pension pot is not as large as they had originally hoped.

For more information about pension drawdown and the risks, read our guide on how pension drawdown works.

As with equity release, the long-term impact pension drawdown can have on finances means that those considering this option should weigh up all options before making a final decision. Again, it may be a good idea to speak to an independent financial adviser who will be able to provide advice regarding individual circumstances before making a final decision.

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