What is a home reversion plan and should you take one out?
A home reversion plan is a type of equity-release scheme that lets you sell all or part of your home in return for cash in retirement. You can then stay living there until you pass away or go into care.
How does it work?
If you’re over 60 and you own your house, home reversion lets you unlock tax-free cash for a more comfortable retirement by selling a share of your home.
As well as cash, which can either be a lump sum or an income, you’ll get a “lifetime lease”. This is a promise that you can stay in your home until you die or move into care. When this happens, your family or estate will receive your share of the proceeds from the sale of your home.
When your home is eventually sold, the reversion company gets their share of the proceeds of the sale. If you sold the entire property to them they will get all of the proceeds. If you sold part of your home, say a half, the reversion company gets that share of the proceeds, leaving the rest to go towards your inheritance.
Is it a good idea?
While home reversion plans can be the best option for some people, it’s important to remember that they are high-risk products and that they could have major implications for tax, benefits, inheritance and long-term financial planning.
You should always get independent financial advice before taking out a home reversion plan or any other kind of equity-release scheme. This will help you find out whether it is appropriate for your personal needs and circumstances.
But in the short term, we’ve put together a list of pros and cons to help you.
- You’ll receive money to pay for your care and living costs.
- You can stay in your own home for the rest of your life or until you have to move permanently into care.
- You won’t have to go through the process of moving home.
- The equity released on your main property is tax-free.
- Equity-release schemes can help to reduce your Inheritance Tax liability.
- You can sell only part of your property, leaving the rest towards your inheritance.
- If you are self-funding your care you might be able to use the capital raised to purchase an immediate need care fee payment plan, which will give you a regular income to pay for care.
- It might affect your entitlement to benefits or lessen the likelihood of support from your local authority, as any money you raise through equity-release is likely to affect the assessment of your income and capital.
- The inheritance you pass on to your beneficiaries will be substantially reduced and won’t include your home itself.
- You’ll receive considerably less than the full market value for your property.
- You’re no longer the sole owner of your home.
- If you end the plan early, you would need to buy back the share you sold at full market value, which could be a lot more than you sold it for.
- It could be poor value if you die shortly after taking it out, though some schemes give families a rebate should you pass away within the first few years.
- They can be inflexible if your circumstances change – not all equity-release schemes are portable from one home to another and you’ll usually need the provider’s permission for someone else, such as a relative, carer or new partner, to move in.
- You might need to pay arrangement, valuation and legal fees.
- You’ll be required to have buildings insurance.
- Lenders will expect you to keep your home in good condition, so you will need to set aside some money for repairs and maintenance.
- You will still be responsible for paying your utility bills and Council Tax, so you’ll need to make sure you can afford these.
Are home reversion plans regulated?
The FSA (Financial Services Authority) is responsible for the regulation of financial services in the UK and any company that’s involved in home reversion plans should be regulated by them. Make sure to ask for proof that they have been endorsed by the FSA before agreeing to anything.
With home reversion plans, you should be entitled to a no negative equity guarantee. This means that if your property does not sell for the amount that you have borrowed, it becomes the problem of the lender and not the problem of the home owner.
It is worth speaking to an independent financial advisor to ensure that you are choosing a home reversion provider that is regulated by the FSA, otherwise you could find yourself with hidden debts and more problems down the line.
What alternative methods do I have for funding care?
If you or a loved one need to pay for care at home or in a care home, it’s important to know the facts. A free care needs assessment is the first step, where you’ll need to get in touch with the adult social services department of your local council to book one in.
Explain that you or your family member needs support managing everyday tasks like washing, dressing and cooking. A social care professional will come to see you to monitor your situation, they will also talk to your GP or nurse.
Other options are:
NHS continuing healthcare
If you have a disability or complex medical problem, you might qualify for free NHS continuing healthcare. This is a package of healthcare that’s arranged and funded by the NHS. It is provided for you at home, or in a hospital, nursing home or hospice.
You’re more likely to qualify if you have mostly healthcare needs rather than social care needs. In other words, if you need a nurse or medical attention rather than a carer.
If you live in Northern Ireland, Continuing Health Care is provided by your local Health and Social Care Trust.
Local authority funding for long-term care
Your local council may be able to help you with the costs of a care home. If you prefer, and it’s appropriate, they can also help you stay in your own home by providing carers, support for carers, equipment and specialist services.
Exactly how much funding you receive will depend on your individual needs (based on a care needs assessment) and how much you can afford to pay towards the costs of care yourself (based on a financial assessment).
Depending on your circumstances, you might not qualify for funding from the NHS or your local authority. Even if you do, the amount you receive might not be enough to completely cover your care costs either at home or in a care home.
If this happens you’ll need to think about how you’re going to top up any contributions or if you have to pay for it all yourself. In this case, it’s a good idea to think about how you can cut costs. For example downsizing in terms of property is a good way to free up some money that you can put aside for later.
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