Could your home form part of your pension pot?
Growing numbers of homeowners are approaching retirement with paltry savings and meagre pensions, leaving them asset rich but cash poor. Nick Birdseye, strategic partner development director at Legal & General Home Finance, explains how retirees can tap into the funds in their home to achieve their retirement dreams.
Retirement has changed significantly over the past 25 years. Not only is it lasting longer, but the final salary pension schemes that many people had in the past are no longer commonplace.
At the same time, today’s retirees are seeking a more colourful retirement than that of their parents and grandparents. Today, retirement can encompass enjoying spa breaks, treating the grandchildren and big ticket items like holidays.
People are now having to stretch their pension pots further and use other sources of income to maintain their lifestyle in later life. Last year we interviewed 2,000 homeowners aged over 55 to ask them about their goals and aspirations for the future and found that 72% still have dreams they would like to achieve.
Despite these financial challenges, retirement is still an exciting prospect for many. The problem is that many people approaching retirement today are asset rich, but cash-poor. This group of over-55s typically has only moderate savings to fall back on yet holds a staggering £1 trillion of housing wealth. That’s a huge chunk of cash locked up as equity, but many don’t know how to access these funds. So, what are the options?
Downsizing is one possibility, and for some people moving into a smaller, more suitable property is certainly a great way of unlocking cash for later life. But many homeowners don’t want to move, either because of an attachment to their home, their local area and friends, or a lack of available and suitable properties.
Lifetime mortgages that offer a cash lump sum are another solution. This option has already helped many people to enjoy their retirement. A lifetime mortgage is a loan secured against their home. It is only repaid from the sale of their home when the last surviving borrower dies or moves out of the home and into long-term care.
With this model, funds can be released straight away as a cash sum, which has advantages for some retirees with a specific project or purchase in mind. A single lump sum isn’t the right choice for everyone, as some people would prefer to have a regular income in retirement.
Developments and innovation
The good news is that some lenders have made it possible to achieve exactly that. Thanks to greater innovation in the industry, it’s now possible to use a lifetime mortgage to secure a regular, fixed income with an initial lump sum in retirement.
For many, this is an exciting development. Imagine having a retirement income that allows you to do more of the things you love. Whether it’s regular evenings out, weekends away, or being able to treat your grandchildren, the money tied up in your home could unlock the door to getting more from your retirement – without having to move, compromise on space or get rid of any possessions.
As a result, income lifetime mortgages are becoming an important part of a tailored retirement plan for many retirees. Even if people already have an annuity to help pay for bills and other necessities, products like these can provide the extra income that they need to make their retirement more comfortable and enjoyable by adding to their pension pot.
It’s important to remember that there is no one-size-fits-all solution when planning for retirement. Some people might want to release the equity in their home as a lump sum so they can pay for the holiday of a lifetime, others may prefer to have the security of a regular income in their later years.
It’s therefore important to seek advice and discuss any plans, goals and personal circumstances with a financial adviser to establish the best course of action. The growing number of equity release products available means that people can now enjoy their retirement in many different ways. And in many cases, that may simply be from the comfort of their own home.
Article By Kate Saines for www.whatmortgage.co.uk