INSIDE MONEY: PROGRAMME 5: “SITTING ON A FORTUNE” PRESENTER: LESLEY CURWEN INTERVIEWEE: COLIN TAYLOR, KEY RETIREMENT SOLUTIONS TAYLOR: So what I’ll do I’ll just go through the basic schemes but each of these schemes have nuances i.e. that you can take an income instead of a lump sum or you can have part lump sum, part income. But basically they break down into two schemes. The first scheme I’ll explain is a reversionary-type plan. Now because it sounds very complicated, reversion, a lot of people do get confused and do worry about this. But it’s quite simple really. The plans been around for over twenty-five years and all you do is simply sell part or all of your property for a lifetime lease and a cash lump sum or an income for life. So, for instance, with your property, £150,000 property, if you sold 50% of that property you will get a lump sum for it. Now that lump sum is depending upon your age and your wife’s age and it’s dependent on life expectancy. You live there rent free for the rest of your life and you have a lifetime lease. So, for instance, if you sold £150,000 property, 50% of that you would actually receive around about £30,000 as a lump sum, yea? If you converted that into income, you’d receive somewhere in the region of £2,200, £2,300 a year in income for the rest of your lives and that would carry on until second death, i.e. until you or your partner died at the end of the day. Even if you went into long-term care, that income would still be paid to you over and over again. Do you understand that? MOORE: Yes, yes I understand that so far. I’m not quite sure how you arrived at £35,000 from a £150,000 property. TAYLOR: We’re talking about selling 50% of the property. If you sold 100% of the property you’d actually get it on a reversion basis, round about £62,000, £63,000. The way that’s worked is simply on your life expectancy and the length of time that money is actually lying there without any payments at all to actually come back. Now that’s based on an investor obviously making... CURWEN: But that means that you’re getting less than half the true value of the property. Why is it so much less? TAYLOR: Okay, because obviously life expectancy now, once you’re over a certain age, 69, 70, your life expectancy would be around about 85, 86. So therefore you’re living in the property rent free for sixteen years and within that time the investment company won’t realise a penny of that cash in that time. So if you took it that you had two properties, both exactly the same, and they both were worth £150,000, and you actually took a couple round the first house which was empty and you said to them, here’s a lovely house, this is £150,000. They say, oh fantastic, but the house next door is up for sale, it’s exactly the same, can I have a look at that? So you go in the house next door and there’s this beautiful house exactly the same £150,000 but you have a couple there and people looking to buy the property says, how much is that property, how much are these people going to pay me? You say, well they’re going to pay you no rent at all. Oh can I move into the property? No I can’t move into the property. Well how much are you going to pay for that property? You’ve got a property next door where you can actually buy it for £150,000; you can rent it out probably for somewhere in the region of £7,000 a year and you’ve got a property with a couple living in it where you don’t gain a penny from it. So it’s actually worked out on that basis on your life expectancy, how much that property will actually make in rent over the fifteen, sixteen years. So if you look at it that way, that’s the way it’s actually worked out. That’s not me, that’s the plan provider. CURWEN: So even though you’re not paying rent every month, the value of that has been taken into account? TAYLOR: That’s putting it in simplistic terms. It’s actually an actuarial calculation in which they work out life expectancy and a rate of return over fifteen, sixteen years and that’s the way they work it out. As I say it’s the plan provider, not me. But that’s just to give you an illustration of how they will actually look at it. You know if you invested £60,000, and you don’t get any return on that for fifteen years. That’s how they work it out? CURWEN: Does that make sense, Brian? MOORE: It makes mores sense but I’m not sure I like the idea. CURWEN: Why not? MOORE: Well because it seems that I’m getting far less than I would have expected. TAYLOR: Yea, I can’t deny there’s no such thing as a free lunch. If you’re going to have a large lump sum from the outset you do pay a cost over the term of years. And if you were 80 years of age, you’d probably end up with somewhere in the region of £75,000 to £80,000 as a lump sum. So the older you are, the reversion scheme comes into its own more. But a reversion scheme really the advantages are if somebody has no dependants, are not worried about dependants at all and wants the maximum amount out at this moment in time, the reversion plan will do that. But it doesn’t suit everybody. MOORE: Okay, well I do have dependants but they are not particularly bothered about any inheritance, so that really doesn’t come into it as far as I’m concerned. TAYLOR: We’ll it just comes down to what you yourself actually prefer. The reversion plan is a plan where you actually know from the outset where you are from day one. You know that you’ve sacrificed 50% of your property or 60% of your property or whatever you sell, you know from day one exactly where you are. That’s one thing about the reversion plan. The other one obviously can guarantee any inheritance in a way because you can actually say, well I’ve sold 50% but I’ve got 50% and always will have 50% and whatever value that goes up, that goes to my dependants. So there is a need for reversion. It doesn’t suit everybody, probably now in the market, probably suits about 20% for the people in the market. The scheme really which has taken over which is the most popular is a rolled-up mortgage and again it’s quite a simple product really. It’s based on you taking out a mortgage, they allow you a percentage depending on your age and the interest on that mortgage is rolled up slowly, and it speeds up towards fifteen, twenty years but it’s rolled-up interest on top of a loan until you either die or you redeem the mortgage. So you move into long-term care and sell the property or you move your relatives and sell the property, then you can actually pay off that mortgage. MOORE: But me as the person who is getting the loan, am I still the owner of the house, or are you the owner of the house, or? TAYLOR: No the product provider, whether it be Northern Rock, Legal and General, Norwich Union, they will have first right on your property, just like when you took out your first mortgage on your property. If you defaulted for any reason then they would have first call on the property to be able to sell the property to get their mortgage back. No but you have full ownership just like with any mortgage on that. It is a strange thing isn’t it? You know we say that we have ownership. But if you actually borrow and you owe £70,000 and you have a property of £150,000, in reality you only own £80,000. But as far as the deeds are concerned, they’re in your name and they’re owned by you and the building society or insurance company has a charge on your deeds. CURWEN: So from the consumer’s point of view, you’re not actually paying interest monthly but interest is added to your loan? TAYLOR: Yes that’s correct and then interest is added on to interest as well. So it’s accumulated over the years. CURWEN: Isn’t that a bit of a scary idea? TAYLOR: It is, but there are certain safeguards within the product i.e. that there is a negative equity guarantee so you can never owe more than actually what your property’s worth. So you know if you look at schemes done in the past which have been now outlawed, they were actually chasing dependants for interest on top of the payback of the loan as well. But these schemes have got that guarantee, there’s no negative equity. But really it’s down to looking at it again and saying which is the best product for me, because these products over fifteen years probably, you know, if you took out a £37,000 loan, you know, over fifteen years you’d probably owe £67,000 in interest. CURWEN: How do you feel about that? MOORE: Worried about that. CURWEN: Why? MOORE: Well it sounds an awful lot, not what I expected. CURWEN: You say you won’t end up in negative equity, you won’t end up owing any more than the value of your house, but if the interest keeps building up you might get to the point where you don’t own any of your home, all of it has gone in interest charges. TAYLOR: Yes that’s true. That’s why I said the reversion plan has its place because at least from the outset you know exactly how much you owe. Whereas this particular plan, a lifetime mortgage, as it’s now called, you can actually roll up interest on interest. Brian, for instance, could have borrowed £37,500 under this plan and after fifteen years he would have owed £69,443 in interest on top of his original loan. That means you’d owe £107,438 in total. CURWEN: We’re talking about three times the money that you’ve actually got out of it? TAYLOR: Yes you are. The other way to look at it, if you actually had property price inflation at 3% over that fifteen years, it would have meant that your property would be worth £233,000. So although you actually owe a total of £107,000 from your original loan, you would still have £126,000 left in your property. CURWEN: But that’s gambling on whether property prices will go up? TAYLOR: Exactly, and obviously if property prices went down, then the negative equity side of it would kick in where you’re guaranteed that you can’t owe more than what your property is worth. But you know, nobody can actually say to you there’s such a thing as a free lunch. If you’re not paying monthly interest, if you’re not servicing the loan, then somehow that loan has to be accounted for and the interest has to be built up. It can sound very very negative the way we’re going through it and to be honest if you put it like that it can be but you’ve got to look at choices and I think that’s one thing we haven’t talked about is choices really. The first choice you should actually look at is moving house. I’m in the business of equity release but the first thing we say to all our customers is, “are you positive you don’t want to move home?” The second choice is, can you afford to pay an interest-only mortgage, because if you can afford to pay an interest-only mortgage, then obviously you can release cash and you’ve not got the build up of interest. If you don’t wish to do either of those two things or you can’t pay an interest only mortgage, then you should look at equity release because there are very few options left to you in life and that’s the point. But only when you’ve exhausted those first two options. CURWEN: Who should not do it? TAYLOR: Somebody who wants to leave an inheritance because it is going to affect your estate. I’m 50 years or age. I will have no hesitation to use my property if I need to when I’m 65 or 70 years of age. I’ve put my children through education and I think, you know, I think we all should actually look after ourselves when we get older and this is one way of doing it. But there are certain people which shouldn’t do it and that’s people who really want to leave a big inheritance or the full inheritance to their children. CURWEN: Brian. MOORE: Well I’ve already discussed this with my two sons and they’ve both made it quite clear that they’re not expecting anything from us. They want us to get the best deal for ourselves. And the other point that you made about moving house, I don’t intend to move house, I want to stay where I am. TAYLOR: You’ve obviously listened to other people, you’ve heard what I’ve had to say about the rolled-up and interest mortgage, and you’ve heard what I’ve said about the reversion. Both of those plans have a negative side to it, that’s obvious. Out of the two plans though, which would you prefer if you had to take either of those two plans? MOORE: Well I think I would prefer the rolled-up mortgage scheme, I think that sounds the better of the two. CURWEN: Why? MOORE: Because I think that’s the lesser of the two evils. TAYLOR: What is the purpose that you actually wish to raise this cash for? MOORE: Well there are a few reasons that I’d like some extra cash on top of my present income. I’d like to be able to spend some on holidays, spend some taking my grandchildren away on holidays. There’s the possibility that I might need a new car, well not a new car, but a replacement car. There’s always the thought that one or other of us would need some medical treatment which we would have to pay for rather than wait years on the National Health Service. So those are the main reasons. I feel that if we just had some extra each month or not necessarily each month but as and when we need it, it’s there to draw on. TAYLOR: To my mind then the scheme which fits the most is the draw-down rolled-up fixed-rate mortgage. All that simply is, it’s a fixed-rate mortgage where the interest is rolled-up but you only draw down what you need, when you need it, and there’s a couple of schemes on the market. One which has just come out which is National Counties which allows you to do that. You’re very lucky because my firm is only one of two which is able to sell these. But that to me is probably the best plan because all the things you just said really is all about people which have got a lack of income, that they’ve used their savings for replacing the car, all these extras since they’ve retired and their savings have been depleted. And the reasons they’re depleted obviously is because you’ve been supplementing your income. So rather than just get a big chunk of cash again, stick it in the bank or building society or whatever, it is far better this way, for you especially, to actually use it via a scheme which allows you to draw down when you need it and how you need it. MOORE: How would that work, what would that cost me? TAYLOR: It’s very difficult to actually work out the interest on a type of scheme like that because it depends on what you draw. But it would cost you probably in charges to set up around about a £1,000 in charges because you would have to have a survey fee done, you would have arrangement fee on that, and by the time you’ve finished with your solicitor’s costs and etc. there wouldn’t be much change out of £1,000 to set it up. So if you needed £2,000 say this year, you draw £3,000 to pay for it and pay your charges with your £1,000 and obviously that’s left you your £2,000. That does mean that straight away you’re paying interest on £3,000 but you’ve then got a reserve to be able to call on when you need it, as you need it, and you’d only pay interest on that as you call it. So the £30,000 you could set aside £30,000 with the building society, take £3,000 originally, from the outset sorry, and you’d pay interest on that £3,000. And then say the year after you might want £3,000 for replacing the car, you’d call up another £3,000 down to replace your car. The year after you might want to take your son or daughter or grandson or grandchildren sorry away on holiday and you draw again another couple of thousand pounds. So it’s like your own little bank account really except you’re not gaining interest on it but you’re not paying interest on it. CURWEN: You’re talking about him taking £30,000 or putting it aside, setting it aside for possible use. How is that going to affect the ownership of his home? TAYLOR: It doesn’t affect the ownership at all. The building society takes out a lodge against your deeds, just like a normal mortgage that we pay at the moment. They have first call on your property but you have full ownership as you did when you first took out your first mortgage or your second mortgage or whatever. MOORE: So what kind of interest rate would I be looking at? TAYLOR: Okay, the interest rate is 6.99% under the scheme that I’m talking about, under the scheme which is the draw-down scheme, which is the mortgage plan, it’s 6.99. CURWEN: That’s much higher than a standard variable rate, about 5%. TAYLOR: True. Again all the schemes on this fixed-rate mortgage rolled-up type plans vary between 6.75 up to about 7.19. So all the schemes are there or thereabouts. Interest rates have been squeezed slowly and they have come down slowly on this type of plan, but again there’s a margin in there because obviously the interest, although it’s rolled-up and although it accumulates quite high, the building society or investment company are not receiving their money for ten, fifteen, twenty, thirty years. MOORE: Is that rate fixed, is it likely to vary? TAYLOR: No that’s a fixed-rate mortgage. So again that’s one guarantee that you’ve got that you know that the interest rate is not going to go up. A year or two ago some people may have took a scheme out, a fixed-rate-mortgage scheme out for 7½% or even just under 8%. So because interest rates have come down, they’re actually stuck with a higher interest rate. You can have variable-capped mortgages which means that you can have a lower rate at the moment but you can go as high as 10% on some of those schemes. So it really is down to you. I think earlier somebody said, “it’s a bit of a gamble.” Well I’m afraid it is a bit of a gamble even with fixed rates. If Interest rates come down you might feel, “oh my goodness I’ve missed out.” But if interest rates go up, you say, “oh my goodness I’m happy, I’ve got a fixed rate.” So it is a gamble. MOORE: A few things just to throw in like what if I go ahead with this scheme and then suddenly decide I want to move house? TAYLOR: Okay, on most of these schemes there are redemption penalties for the first five years. However, again with the scheme that I’ve just explained to you, obviously the rolled-up fixed rate mortgage scheme where you actually can draw down when you want it, that particular scheme as long as you leave a pound in there, that you have a pound, there’s no redemption penalty, so that’s quite good really. My suggestion would be always leave a pound. MOORE: Okay, that’s fine. Are there any restrictions as to where I could move, would I have to remain in the UK? TAYLOR: Obviously, if you moved outside the UK you’d have to redeem the mortgage, you’d have to sell your property and pay off the mortgage. So yes, in that particular scenario. Although if you come to an arrangement with the building society that you wanted to retain your property over here and also the property abroad because you come into some money, then you could do that. The other restrictions would be that if you’re moving into or your last surviving partner is moving into long- term care, then normally they ask for the property to be sold between six months and a year depending on the scheme. Besides that no, as long as the building is sound and it’s not falling down and the valuation comes up to it, yes you can move into another property. MOORE: Would the maintenance of the property still be my responsibility? TAYLOR: Yes absolutely. It’s just as if you had a normal mortgage that you’re there to make sure that the property is sound, and that you keep it that way. MOORE: Suppose I was to win the lottery and I wanted to repay the loan, would that be a problem? TAYLOR: It depends on the timing really. Most of these schemes have redemption penalties that if you redeem the mortgage early in the first five years that you pay a sort of bonus back to them. CURWEN: How big a bonus? MOORE: It depends, but they normally start off with around about 5% of the loan and then they work down to 1%. So in the first year if you redeemed it, if you borrowed £30,000, you’d pay a £1500 charge at 5% and then that would go down to 0 at the end of five years. MOORE: Okay, that’s fine. What if my partner or myself go into care? TAYLOR: If your partner went into care, for instance, Brian and you were still living in the property, there would be no difference whatsoever, you remain in the property. If your partner or yourself had passed away and the last surviving partner, put it that way, went into long- term care, they would then have six months to a year to sell the property. But the property would normally be sold if it was long-term care and that you were there for life. MOORE: Okay, I understand that. If I get to the situation where I take out this loan, that means I’ve got money, extra money, do I have to pay any tax on this money? TAYLOR: It depends on actually how you raise the income. Again if you go for the draw-down fixed-rate mortgage, then the answer is no because it’s seen as return of capital. So you don’t actually pay any tax on that at all. If you went for an annuity type of operation, then yes there would be some tax on it but only marginal. If you went for another type of scheme where you have released a large lump sum, and then converted it into income payments, what we call an annuity, which is just an immediate pension really, that means that you would actually have some tax on that because you are a slight tax-payer at the moment, marginal tax payer at the moment? MOORE: That’s correct. CURWEN: And what about inheritance tax? TAYLOR: Inheritance tax comes in at £255,000. So at the moment with the property being at £150,000, Brian’s quite below that at the moment. I haven’t looked at Brian’s savings. Have you any other savings, investments? MOORE: Yes I’ve got two I think, yes two, which total about £10,000 altogether. TAYLOR: Okay, in that case, in Brian’s case, there would be no inheritance tax at this moment in time. CURWEN: But it’s something that other people need to take into account? If the property was worth more, then how would that affect inheritance tax? TAYLOR: Oh yes we’re seeing large numbers of people now, especially in the south-east, south-west where their properties are well in excess of £255,000 and their estate is looking at a 40% tax on anything over £255,000. So in their particular cases, the reversion plan again works very very well because you’re taking that portion out of the estate. So although you’re giving up probably 40, 50, 60% in some cases, the amount of cash that you would receive on the open market, if you then say, that’s offset against tax, it’s quite a good way of actually using it. Inheritance tax planning obviously is very complicated and equity release is just one tool in the box really to look at. When you’re looking at inheritance tax you wouldn’t do it simply for reducing your inheritance tax liability. MOORE: So in your experience Colin, how do you find people cope with this new way of life that they no longer own their own house? TAYLOR: Well again that’s surmising that they’ve actually done the reversion type plan where they’ve sold part of the property because obviously under the mortgage type plans, they do still own the property. CURWEN: But the loan is rolling-up and rolling-up, they’re owning less and less of it effectively as they go on. TAYLOR: You’re absolutely right. In theory it doesn’t matter what you call it, owning it or you owe it, at the end of the day it’s still a large lump sum coming out of your estate. MOORE: How do people feel about giving up part of their estate? How does it affect them and how does it affect their dependants? TAYLOR: I think it’s an excellent question because I think this is the crux of the matter. I think that the reason this market isn’t as big as what I believe it could be is because an awful lot of people feel guilty about actually not leaving full inheritance to their family. And yet if you ask the majority of children, in fact G. Life did a survey of people between the age of 45 and 55 where their parents owned properties, how would they feel about them doing it. 75% said they would be happy with their parents actually increasing their lifestyle now than having to scrimp along when they’re actually sitting on quite an asset. But from the thousands of letters we receive, a very very small minority, probably 0.5% which says, I wish I hadn’t have done the scheme. The majority of letters we receive saying how it’s actually increased their life because people don’t understand that £200 a month to somebody who’s actually only receiving £105 a week is a big amount of income to them and it makes a hell of a difference to their life. CURWEN: Brian, you told me that you were slightly worried about the idea of not really still owning your own home. MOORE: Yes I think it’s a sort of a psychological feeling. It’s at the back of your mind that, you know, you’ve worked all your life, you’ve paid for your house it’s yours, you stand there and survey your property and suddenly you think it’s not mine any more, or is it, I don’t know. TAYLOR: The only way I can answer that is that I think that is true for a lot a people that they do feel that they haven’t got ownership of their property or they owe a lot of their property in interest payments going on top of the loan. The only way I can combat that, in the sense of how I think people should look at it, is that they’re sitting on an asset there and if you had £150,000 in the bank, would you rather let that £150,000 stay in the bank or would you actually rather use it? Now it might be a different analogy because you’re actually paying interest on the money you’re receiving, but at the end of the day it is the only way of unlocking the cash in your property, is an equity release plan or moving home. MOORE: My original plan was to obtain a lump sum of £40,000, £50,000, put that in a bank or building society and earn 4% interest and then draw on that as and when I wanted £200 a month or whatever. What do you think of that Colin? TAYLOR: I think an awful lot of people start off with that sort of idea when they first think about it, obviously draw off a large lump sum, stick it in the bank, building society or high deposit account. But obviously if you needed a large lump sum for a particular purpose then I’d be talking to you about that. If you actually wanted a large lump sum and part of it into a lifetime income for yourself then I would talk to you about that as well. But what we’re talking about really is a scheme which allows you control of actually drawing a certain amount out when you want it, as you need it and only paying interest on that because you felt that the interest rates were high and obviously being rolled over it would soon eat up your 4% or whatever you get on a high deposit account with the interest which you’re having to pay. So I think the initial idea is a logical idea. It’s just obviously….every scheme is different and every scheme needs to be tailor made and I think this scheme suits you better than a large lump sum and sticking it in the bank or the building society.