Lifetime annuity and reverse mortgage loan – a good alternative to saving for retirement?

To put it mildly, the Polish pension system does not sketch promising prospects for those who end their careers. Many of them also don’t have any savings.

What to do in that case? Perhaps the solution would be an inverted mortgage or annuity offer. The more that any day both will gain their legal form.

The idea of ​​both products is simple. A person reaching the age of 65 enters into a transaction in which, in exchange for the renunciation of ownership of an apartment or house, he receives a cyclical (usually monthly) pension in this respect until the end of his life.

Annuity distinguishes from a mortgage

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Annuity distinguishes from a mortgage is distinguished by the fact that in the case of the former, the buyer of the apartment (bank, fund, insurance company) becomes the owner of the property as soon as the contract is signed.

On the other hand, an inverted mortgage gives the heirs greater room for maneuver – the transfer of ownership takes place only after the death of the rentier. So they can decide to pay off the mortgage and keep the apartment.

Both solutions seem to be interesting propositions for retirees who do not have savings in old age (according to Good Finance, as many as three-quarters of Poles do not have them), allowing them to cash their only capital – a flat or a house.

So much in theory. How does it look in practice? What should you remember when signing the contract? Are we entitled to legal protection? We invite you to read.

A few years of pensions in practice – under the microscope of GFIC

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Lifetime annuities have been in Poland since 2009. At present, they are offered by 7 entities. Despite the potential of this financial product, the scale of the phenomenon is rather marginal so far (until April About 400 contracts were concluded).

This may be largely due to the non-regulation of this form of financing in the law, which, unlike standardized financial products, allows companies to fortify contracts for survival with numerous, sometimes dangerous conditions for the pensioner.

This state of affairs has recently been criticized by the Good Finance Investment Corporation (GFIC), accusing mortgage funds of numerous irregularities in the design of contracts and misleading advertising folders.

According to GFIC, entities offering annuities have deceived potential clients in advertisements, including by the fact that they will pay rent for them, or emphasized the possibility of the property returning to the borrower when the company failed to pay the pension on time. However, none of these promises were legitimate.

The Office also warned that the current legal status, or rather the lack of it, results in the lack of sufficient security of the client in the event of the company’s bankruptcy – which may even result in the loss of a roof over his head.

There were also peculiar provisions in the agreements, for example prohibiting the residence of other people, e.g. family. In total, GFIC found irregularities in the offers of as many as 5 out of 7 funds operating on the market and appealed for quick changes in this respect.

Luckily, the report coincided with the adoption by the government of provisions for two laws: opening the way to the market for reverse mortgage offers and just introducing regulations on life annuities.

What will the new legal regulations bring?

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As we mentioned earlier, an inverted mortgage postpones the acquisition of the mortgaged property until the client’s death. The government draft specifies that heirs will have up to 12 months to repay the loan and retain ownership of the apartment.

Despite the fact that it is by nature a product addressed mainly to older people, the Act does not provide for age restrictions.

Therefore, the reverse mortgage will be available to people of all ages, which is to have a positive impact on its popularization. Skeptics may also be encouraged by the fact that it will be a banking product, which is under the tutelage of the Good Finance Investment Corporation.

Banks will have to value the mortgage at market rates and the condition of the premises. The amount of the benefit will depend on this. However, it is difficult to give even an estimate of it, as the amount of the benefit also depends on the length of life.

However, you can not count on the benefit of 100% of the mortgage value – real estimates say about 50% of the price of the apartment. It is also important that the borrower retains the option of premature repayment until the end, and his benefits will not be subject to income tax.

However, we should remember that after the conclusion of the contract, we will continue to have the cost of maintaining the premises, i.e. rent, renovation or insurance against random events.

New old annuities

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The second law seeks to improve the rules governing endowment contracts criticized by GFIC. Customers are to gain special legal protection in the event of the bankruptcy of the benefit paying company.

The mortgage will first go under the gavel, and when the bidder is not ready to buy it for the required amount, the premises will be returned to the renter (let us remind you that in the case of annuities, the customer relinquishes the ownership of the apartment or house).

Even if a buyer appears, the act will guarantee the rentier an absolute right to live in the apartment until his death, without the possibility of eviction.

It is worth mentioning that although the transfer of property rights is irreversible, under certain conditions, the recipient will have the right to terminate the contract – although the property will not be returned, the company will be required to pay the whole benefit once, with deductions set out in the Act.

Such a condition may be, for example, a situation when a company fails to pay payments to a pensioner on a continuous basis. The project also introduces strict information requirements to counteract ‘colored’ advertisements.

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