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Did you know that almost 1/8 people in the UK have no private or workplace pension? That means many of these people are essentially hoping that the state will look after them when they retire. This is despite the fact that in 2019-20, the maximum amount most people can hope for is about £168.60 per week (i.e. £8,767.20 per year; nowhere near enough for most people to live on). Many people have a workplace and/or private pension, but are still wondering whether this will supply enough income to sustain them throughout (potentially) decades of retirement.
It’s little wonder, therefore, that lots of people consider equity release or downsizing as a way of “freeing up” more cash for their retirement. After all, many people in 2020 can be described as “property-rich, cash-poor”, so it makes sense to consider whether either of these could be a viable option to boost your income in your 60s, 70s and beyond.
In this short guide, our financial advisers here at Cedar House will be outlining some of the key things to discuss with your adviser, if you are considering equity release or downsizing for retirement purposes. If you would like to arrange a free consultation with a member of our team regarding your own situation, please get in touch via:
020 8366 4400 or enquiries@cedarhfs.co.uk
Equity release & downsizing: A brief overview
It’s important to establish exactly what we’re talking about before diving into the pros and cons of equity release and downsizing. Broadly speaking, equity release refers to releasing money from the value of your home whilst retaining the right to continue living there. Downsizing is a bit more conceptually straightforward. You simply sell your existing home and use the proceeds to buy and move into a cheaper one, which will probably be smaller. The remaining cash you have left can then be put towards your retirement savings.
Equity release is more complicated because there are different ways of doing it, and different providers on the market can enable you to do it through a range of different policies. As a simple guide, equity release involves using one of these policies to access some of the value of your home (say, £200,000) and take it as a lump sum, or a set of smaller amounts. The two types of equity release are broadly called:
- Lifetime mortgage, where over-55s can borrow some of the value of their home at a fixed interest rate. Most involve no repayments, so the interest does accumulate quite rapidly over time.
- Home reversion plan, where over-65s can “sell” part of their home to a provider below market value. You continue to live in the property until you die, without paying rent. When your home is eventually sold, the sale proceeds will be divided between your beneficiaries and the provider, depending on how much the latter bought from you.
Pros & cons
Let’s take downsizing first and look at its advantages and disadvantages. One attractive feature of this approach is that it can allow older people to move out of a larger home and into a smaller one. This new property can not only bring a sense of a fresh start (perhaps in a new area), but can also come with lower maintenance commitments and easier mobility (e.g. no stairs to scale every day).
Downsizing also brings a sense of closure. Once the house sale is complete and you have moved house, you can often pay off your new property entirely and have cash left over to put towards your retirement. You don’t have to worry about any mortgage loans or accumulating interest involved with a lifetime mortgage deal.
However, downsizing does come with its disadvantages. It means leaving a home which you might feel very attached to. Possibly, you might need to move to a new area for it to be financially feasible, leaving valuable friends, family and familiar lifestyle behind you. You are also constrained by the housing market. If you struggle to find a buyer, then you might be stuck in your home for longer than you would like.
Equity release is attractive mainly because it allows you to access much-needed retirement cash, whilst continuing to live in your home. This means you can stay on familiar ground and avoid all of the costs, risk hassle and emotional upheaval involved with moving. You also do not need to pay off your mortgage before looking at different policies.
However, you need to bear in mind that equity release could potentially wipe out your children’s inheritance without careful planning. For instance, suppose you take out a £100,000 lump sum on the value of your home, where the policy charges 5.5%. Over 10 years, the interest is likely to amount to over £70,000. When you die, any interest you owe will need to be settled from the value of your estate. This could leave very little left for your loved ones. The good news, however, is that most policies come with a “no negative equity guarantee”. This means that if the interest exceeds the value of your home or the property market implodes, your estate will never owe more than your property’s value.
Invitation
If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation: 020 8366 4400 or enquiries@cedarhfs.co.uk.