Most of us look forward to a happy, healthy, and worry-free retirement, but it takes careful planning when it comes to finances, and it’s never too early to start.
According to the Department for Work and Pensions (DWP) Annual Report, the average age of retirement in the UK is 64.3 for women and 65.3 for men. But we’re living longer than ever before and, with the pandemic forcing many older workers to live on reduced furlough incomes, many of us have put retirement savings on hold.
In this guide to planning for your retirement with equity release, we’ll provide top tips and, hopefully, peace of mind to those worried about generating enough income to supplement their state pension throughout their retirement years.
The UK State Pension In 2021
While the amount of State Pension you receive will depend on the amount of National Insurance contributions you have made during your working life, the current full State Pension in the UK, according to the Gov.uk website, is £9339.20 a year, equating to £179.60 per week.
According to a recent retirement report by Which? many of us overestimate how much we’ll need to live on in our golden years. But with average retirement households spending £17,200 per year on everyday expenditures such as utility bills, running a car, groceries, and hobbies, the State Pension doesn’t leave any room for life’s little luxuries.
If you would like to eat out occasionally and take one or two European holidays per year, you need a combined retirement income of around £25,320. This amount jumps to £40,000 per year if you intend to take long-haul trips and replace your car every five years, leaving a state pension shortfall of more than £21,300.
You can cover some of this shortfall by delaying taking your state pension (for every year you defer, you get an extra £10 per week), or you could draw an income from a work pension or retirement investments. But if you don’t have the luxury of additional savings, equity release could be the perfect option.
Retirement Planning With Equity Release
If you are 55 or over and own your own home, an equity release could be a suitable option for your retirement plan. Rather than selling your beloved family home and downsizing to a smaller, more affordable property, you can stay exactly where you are can live off the investment that you have already made. It’s a win-win solution for those without access to private pensions or retirement savings, but it comes at a cost, as we’ll explain below.
With equity release, you can access the cash value of your property and turn it into a cash lump sum or a monthly income source. As the owner, you retain the right to live in your home for the rest of your life. When you pass away or move into full-time care, your property will go up for sale and, the equity release provider will receive the amount you borrowed plus interest. Anything left over will go to your children or loved ones as an inheritance.
You can use equity release to:
.Boost your state pension
.Reduce your monthly outgoings (outstanding mortgage, credit card debts etc.)
.Create a fixed monthly income
.Turn your state pension into a tax-free savings pot
.Carry out urgent repairs or home improvements
.Spend on whatever you like
Types Of Equity Release For Retirement
There are two main types of equity release that you can use to top up your pension; the first is a lifetime mortgage, the second a home reversion plan. Here we briefly explain the differences between the two. Your financial advisor will help you choose the perfect option to suit your needs.
Lifetime Mortgage
Equity release lifetime mortgages work much the same as regular mortgages in that they are secured against your property and accrue interest each month. But you do not have to make any monthly repayments. The interest amount is added to the final sum borrowed when you die (or move permanently into full-time care) and repaid to the lender from the proceeds of your house sale. Anything leftover goes to your estate. You can take a lifetime mortgage as a cash lump sum to spend on whatever you like or as a drawdown mortgage, which provides a monthly instalment to support your state pension.
Home Reversion Plan
With an equity release home-reversion plan, you sell part or all of your property to a lender in exchange for a cash lump sum and a guarantee that you can live in your home rent-free for the rest of your life. When you pass away or move into permanent care, the lender sells the house, recoups their percentage of the sale, and anything left over goes to your estate.
There are fees involved in setting up lifetime mortgages and home reversion plans and, both options will affect the value of your estate. If you're thinking of using equity release as part of your retirement plan, speak to a qualified, impartial financial advisor to find out exactly where you stand and what you can expect to leave as an inheritance to your loved ones.