In an ideal world, we would all retire with our mortgage paid off and enough money in pensions and other savings plans for us to live comfortably. But what if you haven’t cleared your loan or have enough savings to deliver the income you’ll need? In which case, you might need a plan B.
A recent report from crowdfunding platform The House Crowd found that 78% of the UK’s over 55s feel that they are unprepared for retirement, 41% say their hopes for a secure retirement are no longer possible and 37% say their lifestyle will deteriorate. Meanwhile, research conducted by the Tax Incentivised Savings Association (TISA) found people aged 50 or over were typically facing an income shortfall of £11,400 a year.
For many, the solution will be to work longer. Research from Old Mutual in 2016 found that 30% of 50- to 75-yearolds expected they’d need to work in retirement. This is certainly the most straightforward way of boosting your retirement finances, but what if work isn’t an option or you simply feel you’ve done your graft and want to make the most of your retirement?
For an increasing number of people, property – or more specifically their home – could form their plan B. Indeed, the TISA research revealed that 68% of people said property should play a part in retirement planning.
A quick look at the numbers suggests it’s a logical solution. New research from Retirement Advantage found 63% of people recognise that their home is worth more than their pension and that as house prices continue to go up, the total value of equity available to over 55s is £365 billion. This compares to just £75 billion held by over 55s in personal pensions.
Andrew Tully, pensions technical director at Retirement Advantage, says: “There is a huge gap between what we want in retirement and what our pensions alone will be able to fund. We need to break down the long-held view that we do one thing with our pensions and Isas and something different with our property, and instead consider how they can work together to generate an income.”
For most people, the preferable way to access the equity in their home is to sell up and move into a smaller property. Research by the Office for National Statistics suggests that 28% of people think that property is the safest way to save for retirement and that 23% would downsize to release cash. The TISA research, mentioned previously, suggests that 44% of people would downsize if they faced an income shortfall in retirement.
For some people, their home is quite literally their pension plan. Royal London claims there are some three million people who are relying solely on their property to generate their retirement income.
Experts, however, agree that downsizing is rarely the silver bullet retirees expect.
Jonathan Watts-Lay, a director at Wealth At Work, a provider of financial education in the workplace, says downsizing can work for some people, but many will simply have too great an attachment to the family home. “Say you live in London and retire elsewhere, then it could work really well – but a lot depends on your circumstances. People with grandchildren also very often say that they still want to stay in a family-sized home.”
Steve Webb, director of policy at Royal London, agrees. “While people often think downsizing is the answer, after they’ve done lots of work on their home why would they want to move now that they have the time to spend in it?” Even if you are happy to trade space for cash or accept the fundamental change in lifestyle that may go alongside downsizing, it’s also important to consider how much cash you’ll realistically be able to release and how much income that lump sum will generate.
Steven Cameron, pensions director at Aegon, says: “To get £10,000 a year, you would need a lump sum of at least £200,000 and to achieve that after all the costs of buying and selling would be one hell of a downsize.” He adds: “So much money gets eaten up by stamp duty, estate agent’s fees, decorating, new furniture and so on.”
Moving house is undoubtedly expensive and this is often enough to put many people off, but earlier this year newspapers reported that the government was contemplating plans to incentivise potential downsizers to move and free up more larger properties for families. Possible incentives being touted were help with moving costs or a stamp duty exemption.
February’s Housing White Paper made no mention of the proposal, so it remains to be seen whether the idea will see the light of day.
It is possible to access the equity that has built up in your home without selling up, using an equity release plan. However, despite the fact that you get to raise capital and stay in the family home, it’s often not a palatable solution.
According to TISA’s research, only 6% of retirees would select equity release as an option to boost their retirement income – suggesting the product carries a certain stigma and is very much perceived as a solution of last resort.
However, while levels of awareness of equity release are high, with 66% knowing what it is and a further 23% saying that they had heard of it, when the survey respondents were asked a series of questions testing their knowledge, it became clear they did not fully understand it. Two-thirds answered more than 50% of questions incorrectly and, in most cases, more than 50% of those questioned selected ‘don’t know’ rather than true or false.
The report said that this “lack of understanding creates a real barrier for consumers. But it also states that for many who have failed to make adequate retirement provision, equity release might be a more attractive option than initially thought”.
So what does equity release actually look like in 2017? By far the most common type of equity release product is the lifetime mortgage. Rather than selling a portion of your house to an equity release provider (as you would with an old-fashioned reversion scheme), these products allow you to take out a loan that is secured against it. Unlike conventional mortgages, you don’t make monthly repayments – instead, interest rolls up and the loan plus interest is repaid when the property is eventually sold.
Today’s plans let you take the cash as a lump sum or give you a maximum loan facility and allow you to withdraw funds in tranches as and when you need the money, with interest starting to roll up at the point you take it.
Interest rates on lump sums are currently around 4.5% to 5%, but are marginally lower on flexible withdrawal plans. As interest rolls up for the duration of the loan, the longer you live, the more expensive the loan becomes. However, if you have the cash to spare, some providers allow you to make capital repayments. Legal & General Home Finance, for example, allows four optional partial repayments a year penalty free.
Steve Ellis, managing director of Legal & General Home Finance, says: “Lifetime mortgages are really nothing like the products of old. You aren’t selling or trading your house with an insurance company and you can still move house or downsize. You can never be forced to move either.”
No negative equity guarantees also mean that you will never need to pay back more than the value of your home. As the infographic, right, shows, the compounding effect of interest roll-up does mean your loan size can quickly grow and your beneficiaries may, in a worst-case scenario, not see any proceeds from the sale.
In order to prevent this happening, most providers offer some form of inheritance protection. “If you want to protect money for children, we can keep that money ringfenced for you,” adds Mr Ellis.
While enthusiasm for equity release might be limited, the market is growing. Figures from Keyretirement.com show that in 2016 the market grew for the fifth consecutive year with retirees unlocking £2.1 billion of property wealth from their homes.
With pressure on retirement finances not getting any better, Jon Greer, pensions expert at Old Mutual, says it’s a market that will only get bigger. “We all know that there is an issue of under-saving and people facing shortfalls. The main asset to fulfil that is likely to be the home. Very often people won’t have another fall back,” he says.
Even if more retirees do come around to the idea of equity release, there remains the problem of getting advice. Lifetime mortgages are regulated by the Financial Conduct Authority and advisers need to be qualified to sell them – but this is not the domain of the typical independent financial adviser.
“Just how many advisers can offer holistic financial advice including lifetime mortgages?”asks Mr Greer. “This advice isn’t generally available, but it needs to be.”
TISA is calling on regulators and the advice industry to look at ways of taking property into account alongside other assets in the wider retirement planning process to make it easier for consumers to get advice.
As Mr Cameron says, retirement planning is only becoming more challenging and that means retirees need to be aware of all the options that are open to them. “We are in a golden age of pensions where people are retiring with defined benefit pensions and a state pension that is protected by the triple lock,” he adds.
However, with the triple lock only guaranteed until 2020 and fewer people retiring with the luxury of guaranteed pension income, more retirees will have to consider alternative sources of income. He adds: “I certainly wouldn’t advocate equity release for future retirement planning – it is not an alternative to saving – but it could be a factor to consider to top up your retirement income.”
Rent a room to raise cash
You don’t have to sell up or buy an equity release to cash in on your property. Carolyn Moist, 62, and her partner John Hart, 72, from Kingsteignton in Devon have opened up their three-bedroom home to lodgers to boost their income.
Under the government’s Rent a Room Scheme, it is possible to earn as much as £7,500 each year from letting out a spare room without paying any tax on that income.
Carolyn, who used to work as the town clerk, says: “I retired early to spend more time with my partner, but money was a bit tight so we decided to rent out a room with Spareroom.com.”
That was six years ago and during that time they have had a total of six lodgers, including a trainee nurse, a consultant psychiatrist and a project manager. “It’s not much of an intrusion at all – our current lodger works late and really just needs somewhere to rest his head.”
Carolyn and John enjoy sharing their lives with their lodgers and don’t expect them to hide away in their bedroom. “We’re happy for them to sit with us in the evenings. It was fascinating when we had the psychiatrist with us. We’ve had some lovely experiences together.”
The couple also recently attended the wedding of their longest-standing lodger, Michelle, who rented the room for two years. “Our lodgers can end up feeling like family,” she adds.
Carolyn and John charge £90 a week for the room. “It makes a lot of difference to us as I won’t get my state pension until I’m 65,” says Carolyn. “You do have to be flexible, but we have been lucky and have no dreadful horror stories!”
Using your home to pay for care
While you may have enough money in pensions and savings to get you through the bulk of your retirement, your finances may face one last hurdle if you need a care home. Currently, you will be expected by your local authority to pay fees yourself if you have more than £23,250. Unless you have a partner, older or disabled relative, or child under the age of 18 living with you, this means test will include the value of your home, less any mortgage or outstanding loans you may have on it.
“Around 20,000 to 30,000 people a year have to sell their home for care,” says Steve Webb, director of policy at Royal London. Some people consider giving their house to family to avoid it being included in the means test, but it’s likely that this will be considered a deliberate ‘deprivation of assets’ and you may still have to pay the same level of fees as if you still owned it.
How much will equity release cost you?
As this infographic shows, the longer you live, the more equity release is likely to cost you. This means it may make sense holding off releasing equity until you are older.