Over the next ten years, it’s estimated that 7.7 million workers1 will retire. And while many will be anticipating a well-earned end to their working life, there will also be those left worrying about funding their golden years.
One of the reasons for this is that the ‘pension mountain’2 has grown by three quarters since 2002, and the average earner now needs an extra £9,000 a year in private pension income to have a comfortable retirement. More worrying still, the implications could be even worse for those who don’t own their own property.
So, what options do workers have? And what measures can be taken to secure a comfortable retirement?
In this article, we discuss how and why a quarter of homeowners3 will rely on their property to supplement their State Pension.
New ways of financing retirement
While retirement was traditionally funded with a pre-determined income, at a pre-determined age, today people are exploring new ways of financing the latter stages of their life.
For instance, research from Old Mutual4 in 2016 found that approximately 34 per cent of pre-retirees are happy to consider releasing value from their home to supplement their retirement. One of the reasons for this, it seems, is that over the last five decades, the average house price in the UK has doubled every eight to ten years5. What’s more, the total value of equity available to over 55s is far greater than that which is held in personal pensions, with older owner occupiers believed to hold a total of £2.8 trillion in equity6.
Let’s look at some of the ways people are using their property to supplement their retirement incomes.
Downsizing
According to research from Prudential in 20177, almost four million over 55s are planning to downsize in retirement. Of these, around one in seven (13 per cent) said that they couldn’t afford to retire without the additional income.
By downsizing, retirees could, for example, use the extra cash to buy an annuity which is paid as an annual income. However, while the research found that a typical downsizer hoped to boost their income by around £112,000, a separate analysis showed that this still wouldn’t be enough to supplement the State Pension. In most cases, even with today’s record house prices, very few property owners could fund a retirement solely by downsizing.
One should also consider the volatility of the housing market. For instance, if you intend to downsize during a period when house prices are low, it could leave you having to live off a much smaller income than you expected.
Other things to consider:
- Estate agent’s fees
- Legal fees
- Moving costs
- Decorating
- Furniture
- Stamp duty
- The emotional significance of moving home
When downsizing can work:
- Your home is starting to feel too big
- An older property that needs lots of maintenance
- Property is expensive to run
- You want to move to a different region
Letting out a room
If your children have flown the nest and you have plenty of room available, letting out a room can be an effective way to raise extra funds in retirement. This is usually a good option if you’re not looking to downsize or move any time soon, and need a small and regular supplementary income.
While there are several platforms on which to advertise your room or rooms, it’s also worth considering the government’s Rent a Room Scheme8. Under this scheme, homeowners can let out as much of their home as they want to and, in return, earn up to £7,500 per year tax-free.
However, there are some things to consider:
- Your lodger will have certain rights
- You will be required to keep the property in a good state of repair
- You will earn less money if you share the income with your partner or someone else
Equity release
One of the other ways to supplement a State Pension is to take out what’s known as an “equity release” plan. In its simplest terms, if you are a homeowner over the age of 55, equity release can be used as a means of accessing the cash locked up in the value of your home.
The most popular type of equity release is a lifetime mortgage. Similar to a traditional mortgage, but without the need for credit or affordability checks, lifetime mortgages give homeowners the freedom to live in their property until they die or go into long-term care. What’s more, there are typically no month-to-month repayments to make.
Taking out a lifetime mortgage is a great way to get quick and easy access to the money tied up in your property, and, in turn, bolster your pension pot. Your money can either be paid as a lump sum or in drawdown payments, the latter of which involves creating a reserve facility, should additional funds be required. Drawdown payments offer great flexibility and allow homeowners to reduce the amount of interest accrued in the long term by releasing less equity.
Benefits of equity release:
- Financial freedom
- No need to downsize
- Flexibility
- No negative equity guarantee
Things to consider:
- Roll up interest
- Early repayment charges
- Reduced inheritance
To find out more about how you can supplement your pension with an equity release scheme, please contact the Equity Release Supermarket team on Freephone 0800 802 1051, or email [email protected].
Sources
1. https://www.express.co.uk/finance/retirement/778685/millions-have-to-move-homes-fund-retirement
2. https://www.royallondon.com/about/media/news/2018/may/will-we-ever-summit-the-pension-mountain-new-analysis-from-royal-london/?amp%3Bepslanguage=en
3. https://www.express.co.uk/finance/retirement/778685/millions-have-to-move-homes-fund-retirement
4. https://www.oldmutualwealth.co.uk/globalassets/documents/retirement1/11855_redefining-retirement.pdf
5. https://www.gladfish.com/property-investment-education/how-to-use-property-to-create-your-dream-retirement
6. https://www.telegraph.co.uk/property/news/over-50s-hold-three-quarters-uk-housing-wealth/
7. https://www.lovemoney.com/news/53467/downsizing-equity-release-pension-retirement-smaller-house
8. https://www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme
