Nearly half of homeowners consider home in retirement planning
A survey conducted by equity release provider more 2 life shows that homeowners are increasingly looking to their properties to plug the gap in their pensions.
The firm claims that research among homeowners aged 55 to 64 shows 'strong support' for using property to fund their retirement, while more than half (51%) of younger homeowners aged 45 to 54 regard their property wealth as part of their retirement planning.
According to more 2 life just 17% of homeowners aged over 45 would not consider accessing their property wealth to boost retirement planning.
The firm says nearly 60% of those respondents aged 65 and over indicated that they would like to see more specialised borrowing products designed for retired people.
Dave Harris, managing director or more 2 life, comments: "Pension freedoms have put property wealth at the heart of retirement planning by increasing flexibility over how savers can access their cash.
"There is a very clear and growing demand to access home property wealth across the UK. There are lots of people in the UK whose retirement will be transformed and their tax bills potentially reduced if they looked at their pension and property assets together."
Harris refers to the fact that because they are drawn as a loan against the value of a home, funds garnered through equity release are not subject to income tax, in contrast to pension withdrawals. However, the 'roll up' nature of the interest charged for an equity release 'lifetime mortgage' may mean that retirees pay more in interest than they would through income tax on pension income.
Moreover, those who choose to sell only a proportion of their home in return for a lump sum through home reversion will realise only between 20 and 60% of its market value.
Separate research published by the financial adviser network unbiased.co.uk also shows that fewer and fewer retirees are looking to annuities to fund their retirement, following new pension freedoms that came into force in April.
The firm claims that fewer than one in five retirees now intend to opt for the traditional annuity to fund their pension, as the rates on offer have become less and less competitive as a result of historically low interest rates caused by the Bank of England's £375 billion quantitative easing programme.
The research suggests that one in three people now plan to withdraw their entire pension pot and either reinvest or spend it. This is despite the tax implications, with any funds withdrawn from a pension beyond the 25% tax-free cash lump sum charged at a taxpayer's marginal rate (20%, 40% or 45%).
Commenting on the research, Karen Barrett, chief executive of unbiased.co.uk, says: "There is no denying that the retirement landscape has changed, and what was previously a straightforward transition is now fraught with new questions.
"What's clear from the research is that many people are seeing only part of the picture - they are so keen on the idea of a big lump sum and full control that they forget to think about things like tax, and what happens if their pension pot runs out."
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
An equity release scheme, where the money borrowed against equity in the property (up to a maximum of 50%) is subject to interest charges and although the borrower makes no payments during their lifetime, the monthly interest repayments will roll up and be added to the original debt, which will be settled on the borrower’s death. A lifetime mortgage is distinct from a home reversion scheme in that the lender never owns part of the property. But most lifetime mortgages are sold with a no negative equity guarantee. This means that if the loan is greater than the property’s value it’s a problem for the original lender and not the homeowner.
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.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.