NEST — a defined contribution workplace pension scheme — was set up by the UK government to facilitate auto enrolment. As a ‘qualifying’ scheme, NEST can be used by any and all UK employers to make pension contributions. Employers can auto enrol employees in NEST rather than setting up their own pension scheme.
Members can transfer other Defined Contribution pensions they may have into their Nest scheme, should they wish, and are also free to transfer out to another pension scheme, providing they have stopped making contributions into the NEST account.
Although Auto Enrolment is compulsory, membership of NEST isn’t. NEST is, by design, a very simple scheme offering few bells and whistles. Employers with more sophisticated requirements are free to consider establishing other types of workplace/occupational pension schemes.
With a home income plan, equity is released through a lifetime mortgage or a home reversion plan and is automatically invested into an annuity that is built into the plan, to generate an income for life. A cash lump sum may be available in addition to an income, but the amount may be restricted.
An annuity is a plan that guarantees a series of payments in exchange for a cash lump sum. The income you receive will depend on prevailing annuity rates, your age at the outset and your gender.
The advantages and disadvantages of home income plans largely depend on whether the money is released through a lifetime mortgage or a reversion plan, however, annuities have their own set of pros and cons:
Similar advantages and disadvantages as a regular lifetime mortgage, with additional issues that are unique to this kind of equity release scheme. The main difference is that you don't request the full sum of money available to you immediately. Instead, you decide on a maximum amount of equity you want to release, and 'drawdown' the cash in stages as and when required.
With this plan, you sell part of or your entire home to a reversion plan company in exchange for a tax-free cash lump sum and a guaranteed lifetime lease with no monthly repayments to meet.
You can stay in your home either rent-free or by paying a nominal rent for as long as you choose and you can guarantee an inheritance to your beneficiaries. Both you and the reversion scheme company share in any increase in your property's value, provided you have not exchanged 100% of its value.
A lifetime mortgage is a form of equity release scheme whereby a loan is secured against your property, providing you with a tax-free cash lump sum or a regular income to spend as you wish.
Although there are Lifetime mortgages where you pay the interest (and possible capital) as it accrues, commonly Lifetime mortgages are arranged on a roll-up basis, meaning that borrowers will not be required to make payments during the term of the loan, instead the lender adds the interest that accrues to the original loan amount. ‘Roll-up plans’ can be very useful but borrowers must remember that the amount of the mortgage debt can increase quickly due to ‘compounding’ – i.e. you will be charged interest on the original loan and any interest that is added to the loan account.
Interest is added to the lifetime mortgage loan throughout your lifetime, accruing at a fixed or variable rate. The loan plus interest is eventually paid back when the home is sold which could be when you move into long-term care, or when you and your partner die. Subject to your age you can typically release between 18-50% of the value of your home with a lifetime mortgage.
There are two equity release schemes available on the market offered by reputable equity release providers, and they fall into two main categories:
Lifetime Mortgages
Home Reversion Plans
Each type of equity release scheme facilitates a different method of releasing the equity in your home, and there are various other useful features available to create the ideal equity release scheme for you, including:
Protected Equity
Many equity release schemes come with a no negative equity guarantee, and in some cases, there are plans which also enable you to protect a fixed share of the value of your home. For example, if you protected a 30% share in your home, you have a guarantee that a minimum of 30% of your property value is protected for you in later life or as an inheritance for your beneficiaries.
Impaired Life
Some providers will allow you to release more capital from the equity release scheme if you suffer from one of a list of health conditions.
If you're a home owner over the age of 55, equity release offers you a way to use the value of your home to raise money. You won’t have to make monthly repayments but the debt will eventually have to be repaid – with interest.
It is advised that you seek Independent Legal advice before entering into a legally binding equity release contract.
Why do people consider Equity Release?
To provide an additional income in retirement
To provide lifetime gifts to relatives
For home improvements
For holiday home purchase
To fund long-term care
You may have other ideas - there is no restriction on how you use the funds.
However, since equity release can be an expensive way to raise money when taking into consideration payment of arrangement fees or interest, you should also consider the following:
For those who want to build their own home, a conventional residential mortgage is not an option. Instead, the self-builder would need to apply for a self-build mortgage. Not every lender is active in the self-build mortgage market and those that are, tend to charge a higher rate of interest for self-build mortgages. Self-build mortgages involve regular site inspections, and additional administrative tasks and are deemed to carry more risk for the lender than conventional mortgages do. Also, the self-build mortgage application can take longer to process than average — five or six months is not unusual.
Key requirements
The lender will want to see detailed plans for the property, an accurate build cost projection, and building regulations approval and would expect, at the very least, outline planning permission to have been granted. Rather than the borrower taking on the build, lenders are likely to require a professional builder or a qualified project manager to be appointed.
Buy-to-let (BTL) mortgages are specifically for individuals who wish to buy residential property which they intend to rent to tenants. Although a BTL mortgage is similar in a number of respects to a standard residential mortgage, there are some significant differences between the two.
Eligibility and lending criteria
Most banks and building societies (and some other financial institutions) offer BTL mortgages, but terms, conditions, and costs vary enormously.
Some mortgage providers will not lend to individuals who are under 25 years of age or earn less than £25,000 a year. Lenders may impose an ‘upper’ age limit on the term of the mortgage by insisting that the mortgage is repaid in full before the borrower reaches a certain age — 70 is not untypical.
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