This case study looks at how a RIO could help fund a family member getting onto the property ladder.
Julian and Sarah, 69 and 67; both retired
This case study does not represent real people and is for illustrative purposes only.
Julian and Sarah's story
Julian is a retired accountant and his wife Sarah is a retired civil servant.
They own their own home outright in Dorking. It's a four-bedroom detached property, which has recently been valued at £730,000.
They've two grown up children aged 32 and 34, who both have careers but are renting flats in London to be close to work. They're both saving for a deposit for a bigger home as they both want families of their own. Julian and Sarah know how hard it is for their children to get on the property ladder and they're keen to release some of the capital in their home to help their children buy their first homes.
Julian is using a drawdown pension he set up years ago and has a drawdown fund of £450,000, from which he is drawing 3.5% on an annualised basis, giving him an annual net income of £14,200. Sarah gets an income from the government Defined Benefit Pension (final salary pension) scheme she belongs to, which gives her a net annual income of £18,000.
What they want
- To gift some of their wealth to their children during their lifetime, so that they also get to enjoy watching the benefits this gift will bring
- To remain in the the home that they raised their family in.
- To release some of the capital in their home to give a cash sum to both their children, to go towards the deposits they need to buy their own homes. They would like to release £100,000 and give £50,000 to each child.
table Assets Expected outgoings
House value: £730,000
Julian's pension scheme: £450,000 fund (annual income of £14,200 after tax1)
Sarah's Defined Benefit pension scheme: £18,000 after tax
Combined State Pension: £13,600 a year
Living expenses: £1,600 a month1The value of Julian's drawdown pot and any income taken from it is not guaranteed and can go down as well as up.
A RIO mortgage would allow them to release the capital they need to offer a living inheritance to their children.
With significant assets and a low loan to value they should pass the affordability test comfortably.
They're aware of the inheritance tax (IHT) rules around gifting, which would mean that if they were to die within seven years of gifting the money to their children they would have to pay income tax on the amount they received. Based on their current health and age, Julian and Sarah expect to remain alive beyond the seven year rule that applies.
Benefits for Julian and Sarah
They could use a RIO to deliver on their wish to offer a living inheritance to their two children, while staying in their own home. They can reasonably expect to provide a further inheritance to their family once they have died.
What are the potential risks?
Your client should think carefully before securing other debts against their home. Their home may be repossessed if they don't keep up repayments on their mortgage.
Their ability to make the payments may be affected if:
- Their income falls in the future.
- Their expenditure increases in the future.
- Inflation reduces the purchasing power of their income.
- One of them dies (they'll need to consider whether the death benefits of their partner's pension scheme will be enough for them to continue making the interest payments).
Taking out a mortgage in later life could limit their future choices too. For example:
- It might affect their family's inheritance when they die.
- They may not be able to afford any additional care needed in later life.
- Their future choices in moving home could be limited.
- Opportunities to borrow from other sources could be limited.
- If the loan is for life, they'll repay the loan from the proceeds of the sale of their home when the last borrower enters into
long-term care or when they die.