Equity Release can have an important role to play in pension planning. As all good financial advisers know, putting money into a pension fund is often one of the most tax efficient savings potentially available. With higher rate tax relief at 40%, the more that one can put into a pension fund the better.
The problem for many people though , is that while they have potential capacity to put money into a pension fund, having significantly less than the maximum amount currently of £1.6m allowed, they cannot afford to make cash contributions.
For these homeowners who are aged over 55 and are still earning. equity release can be a very tax efficient solution.
The following example shows how this can work in practise:
A homeowner aged 60, earns £100,000pa, has limited savings ability and owns a house worth £1,000,000. The home owner would like to retire in 5 years time but has insufficient pension.
The homeowner takes a lifetime mortgage plan to fund contributions to a pension plan. If they do not already have a pension plan, this may entail setting up a SIPP.
The client makes contributions totalling £200,000 over 5 years to the pension plan. The pension fund claims basic tax relief each year , and after 5 years growth at the risk free rate of 5.0% and allowing for typical fund expenses, the fund is worth £266,000.
The homowner funds the contributions by borrowing in total £150,000 on the lifetime mortgage and by claiming the higher rate tax relief on the pension contributions. After 5 years, the mortgage balance including interest rolling up at 6.49% is £174,000
Netting out the two figures, the homeowner on retirement has a pension fund which is worth £92,000 more than the value of the loan.
In order to evaluate whether or not this route may be appropriate, it is essential you work with suitably qualified pensions and equity release advisers. Happily, at Michael Knight Mortgages I have linked with MKB IFAs in Earls Barton to offer a complete service in this respect. Naturally this is a very complex area so if you are interested in finding out more, call me on 0845 029 1962 or michael@michaelknightmortgages.com