Should you sell up and rent in retirement?
People in retirement own UK property worth a hefty £774.2 billion, according to figures from Key Retirement Solutions. But while some tap into this wealth through equity release or by downsizing, a growing number of retirees are looking to ditch home ownership in favour of renting.
Recent research by Prudential found 25% of retirees live in rented property, with more than two fifths of these tenants being former homeowners. "We were surprised by this, but the research shows that the decision to sell the home was mainly driven by financial reasons,' says Vince Smith-Hughes, retirement expert at Prudential. "40% of those who'd sold up did so to pay off debts; 19% were releasing funds to cover the cost of a divorce or separation; and 9% used the money to boost retirement income."
Reasons to rent
But whatever the reason for leaving the ranks of the homeowner brigade, renting a property can be an attractive option in its own right in retirement. For starters, although your monthly rent will become a new financial commitment, because rental properties are often smaller than the family home the running costs are often lower. Also, as a tenant you won't need to worry about expensive property maintenance, or the fees and hassle associated with buying and selling if you do need to move again.
It can also provide flexibility, as Dean Mirfin, group director at Key Retirement Solutions, explains: "It's common for people to want to move near their children and grandchildren in retirement, but this might not be possible if they live in a more expensive part of the country. Selling up and renting may enable you to make the move."
As an extreme example, one of the retired couples renting through specialist property managers Girlings Retirement Rentals does so to enable them to spend time with each of their three children's families. The families live in different parts of the country, so the couple rents a property close to one of them for a year, before moving to be near another child the following year.
And even for those without children, renting can be a more sociable option. "When you're in your 70s or 80s and your partner dies, the loneliness can be debilitating,' says Caroline Hull, executive manager at Girlings Retirement Rentals.
"All of the rental properties we offer are purpose-built for the retirement market and include facilities such as residents' lounges and house managers, which can help to beat loneliness."
As well as satisfying lifestyle requirements, renting can also have financial planning benefits. From an inheritance tax (IHT) perspective, owning a property can be problematic. Moving it out of the estate is difficult, especially if you intend to continue living in it, and with the nil-rate band fro- zen at £325,000 (£650,000 for couples) until at least April 2015, many people find most, if not all, of this is swallowed up by their home, leaving them little room to reduce their IHT liabilities.
Although selling up doesn't necessarily solve the IHT problem, as most people want to hang on to sufficient cash to cover future rent and living expenses, converting the property into a liquid asset does give more flexibility around estate planning. For example, you could make regular gifts out of taxed income to take advantage of one of the IHT exemptions. Provided these payments don't impact your lifestyle, they will be immediately outside your estate for IHT purposes.
Home ownership can also cause difficulties if you need to go into a care home. Hull explains: "If you're renting you don't need to go through the heartache of trying to sell the property to cover care home fees. It's much simpler to give notice on your tenancy." If you are considering selling your home to move into rented accommodation, it's important to be aware of the rules relating to long-term care funding.
As part of your local authority's financial means test to establish whether you qualify for help with the cost of care, it will check whether you ever owned a property. "Local authorities are always on the lookout for money that has recently disappeared, and they can go back as far as they like in their search," explains Mirfin.
"If you sold up to rent for a lifestyle change, there probably wouldn't be a problem, but if you have recently sold your home and given your children an early inheritance, the local authority may investigate and could treat you as if you still had the money."
Supplementing your retirement income
With our homes often our largest asset, a growing number of people are relying on the value of their property to fund their retirement. But before taking the leap it's important to work out where this leaves you financially. If you decided to sell your home and rent a one bedroom flat, and invested your money to supplement your income, here's how the figures could stack up.
Examples of funding retirement from the process of a home sale
|House sale net proceeds||Annual return if invested at 5%||Annual return if invested at 3%||Annual rent||Annual net loss/gain at 5% return||Annual net loss/gain at 3% return|
Although renting is gaining in popularity, it's not without its drawbacks. One of the biggest is the lack of certainty you have over remaining in the property. "Security of tenure is an issue in the mainstream rental market," says Ray Boulger, senior technical manager at John Charcol. "The average buy-to-let mortgage restricts the length of the rental agreement to 12 months, so you could find yourself having to move if the landlord wants their property back."
This isn't always the case, though. For example, at Girlings customers are offered an assured tenancy instead of a shorthold tenancy of up to 12 months. With this, after an initial term of 12 months tenants are entitled to remain in the property as long as they like, giving four weeks' notice if they wish to move.
This additional security does mean the rent is slightly higher than on a property with a shorthold tenancy. For example, a one-bedroom apartment in Bournemouth is available for £625 a month through Girlings, while a search on Rightmove throws up similar properties in the same area for between £525 and £595 a month.
However, Hunt says that the difference is only small when you consider the security of tenure, and other services such as a residents' lounge, house manager and 24-hour emergency cover that aren't standard in the mainstream market.
While there are options to avoid having to move from one rented property to another every year or so, the other significant downside is budgeting. "People under-estimate their longevity. It's not unusual to live another 20 years if you're in your mid-60s," says Smith-Hughes.
"Having the proceeds of a property sale in your bank can feel very reassuring, but it can go surprisingly quickly, especially as the cost of living is higher in retirement due to increased spending on heating and food."
For example, say you walked away from a divorce with £150,000 from the sale of your home, and opted for one of Girlings' featured properties – a one-bedroom apartment in East Yorkshire at £525 a month. This money would cover you for just over 23 years, assuming (unrealistically) the rent didn't increase and you didn't realise any growth on your money.
But if you also need money to cover a shortfall in your pension, the figures start to get stretched, unless the money is invested to produce a return (see box opposite). Additionally, with rent potentially forming a large proportion of your monthly outgoings, any sharp increases could hit your budget hard.
Girlings addresses this by capping the maximum annual rent rise at 6%. "If we do have a period of raging inflation this provides some reassurance that your rent won't increase significantly," says Hull.
Look before you leap
While selling up to rent in retirement appears to suit a growing number of people, it's not the only option. If you're wedded to staying put, equity release may be an option. This allows you to take some of the capital out of your property but, with interest rolling up on the money you release, it can be expensive.
Downsizing to a less expensive property is another alternative. Mirfin says that one in five of the people who contact his company about equity release end up releasing capital by moving to a cheaper property. "If you're happy to move, and there are suitable properties available, this is the most efficient way to release capital," he says.
Further, if the primary appeal of renting is the type of property on offer, it's also possible to purchase these on a leasehold basis. As an example, a one-bedroom retirement apartment in Bournemouth with access to a manager and 24-hour emergency sup- port can be picked up for anything from £60,000 to more than £200,000.
Boulger concludes: "Your property is a key asset and, with some of these options, it might only be possible to do them once. Make sure you weigh up the pros and cons carefully."
This feature was written for our sister publication Money Observer
The right to hold or use assets (generally property, but also vehicles) for a fixed period of time at a given price, without transfer of ownership, on the basis of a lease contract. Leasehold ownership of a residential property is simply a long tenancy, the right to occupation and use of the flat for a specified period – the ‘term’ of the lease, which is fixed at the beginning and so decreases in length year by year and the property can be bought and sold during that term. When new, leases are for 99 or 125 years until its eventual expiry, whereupon ownership of the property reverts to the landlord.
A test to assess the financial “means” or resources (income, savings, property) of a person to determine whether or not that person is eligible for financial assistance (such as state benefits, legal aid, free prescriptions, etc) from the government. A means test can also be used by the courts to determine whether or not a person is eligible to enter bankruptcy proceedings or if they have the means to repay their debts to their creditors.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).