In recent decades, there have been huge changes in where retirement income comes from. Gone are the days when you live your later life using the income generated from your company or State Pension!
Indeed, research from the Department for Work and Pensions has revealed that, for the average pensioner couple, only around two-thirds of their retirement income comes from traditional pensions.
So how are retirees funding their retirement?
As well as investment income and increasing numbers of older people remaining in the workforce, property has become an alternative source of retirement income.
Older people turning to property to boost retirement income
New research has revealed that older clients are increasingly turning to their housing wealth to bolster their income in retirement, either through an equity release product or by releasing cash through a remortgage.
Recent figures from UK Finance showed 16,800 borrowers released cash using a remortgage transaction in December 2019. This represents a 6% year-on-year increase compared to the 15,900 who remortgaged with additional borrowing in December 2018. According to the figures, an average sum of £50,700 was released through such remortgages.
The number of Buy to Let remortgages also increased year-on-year, by 2.3% to 13,300.
According to experts, this rise in remortgaging is partly attributable to the number of borrowers using the process to release cash from their property to bolster their income.
Alice Watson, head of marketing for insurance at Canada Life, said: “The figures from UK Finance show older homeowners have become increasingly comfortable drawing on property wealth – from their own home or their Buy to Let portfolio – to help support their lifestyles.
“The rise in buy-to-let remortgages also suggests landlords are keen to unlock the value in their portfolios. There are Buy to Let mortgage products available to over-55s which allow them to release cash tax-free, while leaving their portfolio intact and allowing them to continue to draw on its rental income.”
The trend has been mirrored in the equity release sector in recent years. Data from the Equity Release Council has revealed that older homeowners released about £15 million from their properties each working day in 2019.
This added up to a massive £3.92 billion over the year, a 170% rise when compared to the £1.45 billion released from property in 2015.
How to access the wealth in your property to supplement your pension income
Many people expect to generate a lump sum in their retirement by selling their home and moving into a cheaper property. However, depending on where you live and the costs of buying and selling, this might not be straightforward.
Steve Webb, director of policy at insurer Royal London, says. “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 prepared to move to a small home or accept a change in lifestyle, there may be questions about how much you will actually be able to generate by downsizing.
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. So much money gets eaten up by stamp duty, estate agent’s fees, decorating, new furniture and so on.”
If you have guaranteed income such as earnings or a pension, you may be eligible to take out a standard mortgage.
You can remortgage, whether you own your home outright, or you have an existing mortgage. If you have equity in your home, you may be able to increase the borrowing, subject to affordability and the equity in your property. You will have to make monthly repayments and these will be determined by:
- The amount you borrow
- The term of the mortgage
- The interest rate
Many lenders have a maximum age limit for mortgages and so you would have to pay off your mortgage before this age.
If you’re over the age of 55, equity release allows you to release cash from your home. The interest rate on the borrowed cash ‘rolls up’ — meaning the interest is added to the value of the loan. This means you don’t make any monthly payments until the loan is repaid; typically when you die or go into long-term care.
Equity release has become popular to:
- Repay mortgages, particularly ‘interest-only’ mortgages
- Supplement income in retirement
- Generate capital to help family members, for example, to provide a deposit for a first home
Under a home reversion scheme, you sell some or all of the equity in your home to an investor. They own that share of your home until it is sold, and then they get their share back. They expect that the property will increase in value by the time it is sold.
You receive a lump sum for the percentage you sell to the investor, although bear in mind that the amount you receive may be calculated at a large discount to the current value of the property.
Even if the investor becomes the sole owner of the property, you have the right to live in it until you die or enter long-term care with no prospects of returning to your property.
Retirement interest-only mortgage
A retirement interest-only mortgage is an interest-only lifetime mortgage.
When you take out a retirement interest-only mortgage you don’t repay the loan until you die, or you go into long-term care. Unlike a traditional mortgage, there is no mortgage term and you don’t need a repayment vehicle as you would with a normal interest-only mortgage.
Under this type of arrangement, you make monthly interest payments. This means you’ll always owe the same amount you took out.
Unlike traditional equity release, your affordability will be assessed if you want to take out a retirement interest-only mortgage as a lender needs to be satisfied that you will be able to afford the repayments.
Get in touch
If you have any queries about supplementing your pension income, please get in touch. Please email firstname.lastname@example.org or call 01454 416 653 to find out how.