Dwindling pension pots mean the number of retirees tapping their properties for income is expected to rise by nearly 50 per cent over the next decade.
Research compiled for The Mail on Sunday reveals that one fifth of over-50s – around 3.9 million people – are planning to solve a cash crisis in retirement by downsizing, making use of buy-to-let property or borrowing against the value of the family home.
Borrowing, commonly known as ‘equity release’, is rising in popularity. Unlike a conventional home loan, equity release does not require a borrower to pay any monthly interest charges. Instead, the interest charges roll up into the loan with the final debt usually cleared when the homeowner dies or goes into long-term care.
Some £10 million a day this way has been released from wealth tied up in property in the first three months of this year – more than double the amount taken in the same period just two years ago. Over-50s planning to release wealth from property are forecast to borrow £37 billion via lifetime mortgages, according to research by provider OneFamily.
Nici Audhlam-Gardiner, managing director at OneFamily, says: ‘Homeowners are seeing their property as a good way to fund their retirement. This comes as income from pensions, both state and private, decreases.’
Sarah Coles is personal finance analyst at investment adviser Hargreaves Lansdown. She agrees that pension provision is weakening. This is particularly true of final salary pensions which pay a guaranteed income for life.
She says: ‘People are enjoying the peak of final salary pensions. From here on in, we will start seeing the impact of their decline. When people in their 50s retire, only a third will be getting income from a final salary pension. As a result, more will have to tap into the value of their home to address a need for income.’
Despite seeming a straightforward solution for income-hungry retirees, homeowners are advised to pay due attention to the pitfalls of using property as a pension.
Save hard now to give your retirement plan a lift
- Save big and save now. Put as much as you can into pensions, savings or investments. You will need it if you want to stop working.
- Seek independent advice. Even if you have never used a financial adviser before, it becomes more necessary the older you get. An adviser will look at whether you have enough assets to see you through retirement. Visit websites unbiased or VouchedFor to find one – or ask friends for a recommendation.
- Forecast your retirement finances. Seeing your retirement in hard numbers will flag potential limitations. Useful guides are available at moneyadviceservice.org.uk/retirement.
- Speak to free-guidance service Pension Wise for help on how you can take income from any pension you may have. Visit pensionwise.gov.uk or call 0800 138 3944.
- Approach a member of the Equity Release Council if you are considering a lifetime mortgage or home reversion plan. Members offer safeguards including your right to remain in your home and a ‘no negative equity guarantee’ – meaning the debt will never exceed the value of your property. To find or verify a member visit equityreleasecouncil.com or call 0300 012 0239.
- The Mail on Sunday has produced a guide on unlocking the cash from your home. For a free copy, call 0800 531 6012.
Investing in a buy-to-let property to generate retirement income can be profitable. But there are significant upkeep costs, periods when the property might be empty and capital gains tax to be paid when the property is sold. It is also an unrealistic goal for many retirees who do not have the means to buy a second property. Downsizing is an alternative way to raise cash, but it is not without drawbacks.
Coles says: ‘Over time, a property becomes more than just a pile of bricks. We get emotionally invested in them. As a result, you can struggle to part with the family home, you might want a base for grandchildren to come and stay, and you may not want to leave your family and friends behind.’
CASE STUDY: Why property is my pension
Ian Banks says his property is his pension – perhaps unsurprising given he works as a property developer.
The 50-year-old, who is married to Emma, 44, lives in Hove, East Sussex.
He says: ‘I feel I cannot go wrong with bricks and mortar. It is the best investment you can have.’
Ian paid into a pension for ten years, from age 18 to 28, investing £21,000 over that time. But since he stopped contributing the investment has failed to flourish.
By comparison he has his own home and a buy-to-let property to sell or rent out for income in future. Ian will continue working into old age. ‘I might take it a bit easier,’ he adds. ‘But I will not put my feet up.’
Options: Ian Banks has a home and a buy-to-let
The difference between the value of a person’s home and the price of a smaller property may also not be big enough to generate a significant lump sum, particularly once moving costs are deducted. Downsizers also avoid paying a high price tomorrow for a lump sum today – which is the case with equity release.
If homeowners have not discussed equity release with family – as they should as a matter of course – the slice of a family home sacrificed to repay a debt that will have ballooned over time can come as a big shock. But for many it is the only solution to address a severe drought in funds during old age.
Equity release products sold in the 1980s and 1990s were poor value for money. But standards have improved.
OneFamily’s Audhlam-Gardiner says: ‘One of the biggest concerns from homeowners is that they will lose their home. They also worry they will either not be able to leave an inheritance or there are strict rules about how any money released can be used. All of these concerns are ill-founded.’
The real danger of lifetime mortgages is compound interest – the ballooning of the debt as interest charges are capitalised, triggering higher charges on an ever increasing loan.
WAYS TO RELEASE CASH FROM PROPERTY
- Home reversion plan: You sell part or all of your home to a provider for a tax-free cash lump sum. The provider guarantees you the right to live in your home, rent free, for the rest of your life. When your property is sold, proceeds are divided according to who owns what percentage.
- Lifetime mortgage: You take a loan against the value of your home for which interest is charged. You retain ownership of the property – and the loan, together with interest, is repaid after you die or move into long-term care. The interest rolls up each year although you can choose to make interest payments – monthly or ad-hoc – to limit the impact of compound interest.
- Retirement interest-only mortgage: A Simpler form of lifetime mortgage where interest is repaid each month. The loan therefore does not swell and wealth in the property is preserved for family members to inherit. The loan is repaid once a homeowner dies or goes into care.
WHY A PENSION STILL MAKES SENSE
If using your home to fund retirement does not appeal, the alternative is to focus on saving – and fast. Coles adds: ‘It may feel like it is too late to do anything about a pension shortfall, but there is still time to make a big difference.
‘Save as much as you can afford into your pension as quickly as you can.’
She adds: ‘If children have flown the nest, this is your opportunity to focus on your pension planning.’
If a 50-year-old were to start saving now, contributing £400 a month and having it matched by an employer, they could have a £174,000 pot by retirement at the age of 67.