Providing an Income

Instead of taking a lump sum or a series of lump sums, you may choose to take a regular income. This option is available under home reversion plans (for a set number of years) and lifetime mortgages.

The advantage of taking an income from a lifetime mortgage is that you only pay interest on the income you have taken. The loan is therefore smaller in the early years than if you had taken a large lump sum as is the interest on the outstanding loan.

Alternatively, you can take a lump sum and use it to purchase an annuity with a life assurance company, but of course you pay interest on the full lump sum from the start. This is one of the reasons why annuity purchase is not a popular option.

John’s Income Plan

John lives in a £400,000 property, but he wishes to supplement his pension. He chooses to take the income option. With this, he receives £100,000 in monthly instalments of £833 over the next 10 years. He pays interest on the money he has received.

He pays no tax on he income: this would be the same as receiving an income of £1,041.25 after deducting the basic rate of income tax.

What are the advantages of the Income Option?

All the advantages of a lifetime mortgage or a home reversion plan
You only pay interest on the outstanding loan which is smaller in the early years than if you had taken the whole loan ‘up front’ and as a lump sum.

Are there disadvantages of the Income Option?

There is no lump sum at the commencement of the plan
Your estate doesn’t reduce so quickly for inheritance tax purposes as if you took the loan as a lump sum
There are few providers and terms are likely to be less competitive.
Annuity purchase should not be considered without specialist advice from a financial adviser

If you would like to discuss your equity release options with an impartial specialist, call freephone 0800 077 6599. You can also try our online equity release calculator.