Ruby, 68, needs £60,000 over the next 10 years. Plan 1: take £60,000 now as a lump sum. Plan 2: a drawdown lifetime mortgage taking £30,000 now and £30,000 in 5 years. Both roll up at 6% a year, compounded annually, with no payments. Roughly how much lower is the debt after 10 years under Plan 2?
Plan 1: £60,000 × 1.06¹⁰ = £107,451. Plan 2: £30,000 × 1.06¹⁰ = £53,725, plus £30,000 × 1.06⁵ = £40,147, total £93,872. Difference ≈ £13,579. About £10,100 is the interest the second £30,000 avoids in the first five years, but it ignores that this interest would itself have compounded for five more years; about £9,000 uses simple interest. Drawdown limits compounding (Walbrook CeMAP spec MRT2 AC1.5).
Ignoring the compounding on interest saved in the early years.
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