Lots of us may have heard people say “My home is my pension”. That’s because for many people approaching retirement it’s their largest asset. That’s great, but there are a number of practical issues to consider. Relying on your own home to provide a retirement income may not be as simple as it sounds.
We explain the issues and what you need to think about below.
Home equity and pension savings
Many people will have lots of equity in their home when they approach retirement. This is due to the relentless price rises over the last thirty years. This is especially the case for those in London and the South East.
Many of these same people may not have saved much into their pension pots. They may also have not been lucky enough to be members of a final salary scheme whilst working. This may be especially the case for the self employed. They were never opted into a pension pot by their employer. If they paid into one themselves, they did not get employer contributions alongside theirs.
People in this situation may be considered…. “Home equity rich but pension poor”.
That’s ok, the equity in their home can be used to get by in retirement? Well perhaps, but its not as simple as it sounds.
People love their homes!
The easiest way to get some of the equity out of your own home is to sell it. Then move to a smaller or cheaper house, banking the difference. As a bonus, that money is tax free. It makes sense, you may need less space anyway.
Despite this making perfect sense, in reality many people simply don’t want to do this. Why? They love their home, their community plus all the memories and comfort the home provides.
Lots of people who thought they would do this, just can’t face it. They want to stay in their home even if it doesn’t make financial sense to do so.
If you aren’t willing to downsize or move to a cheaper area, then “My home is my pension” has an obvious flaw.
So how can you get some equity out?
If you don’t want to sell, equity release is the only option. So what is equity release?
In short, it is borrowing, which you pay back all in one go later. You live in your home until you and your partner both pass away, or go into care. Then your home is sold to pay back the loan plus interest. Anything left is passed on to your dependents.
Equity release can be used for lots of reasons and you often see adverts talking about using it for exotic holidays, or other spending.
For many people though, as we say, they will just need some equity from their home to support a reasonable income in retirement. Where people simply don’t have enough pensions and other savings to provide this, it needs to be factored in and understood as a potential option.
What types of equity release are there?
There are two main types, lump sum and drawdown.
Lump sum provides money to use now. Drawdown provides an agreed limit which you can borrow and take as and when needed over time.
The advantage of drawdown is that interest isn’t charged until you actually take the money, whilst for a lump sum it is charged from day one.
There are many other features which may exist in some in equity release products, such as negative equity guarantees. This means the amount paid back never exceeds the sale value from your house, no matter what happens to the future house prices, or how long you live.
As you can see equity release isn’t simple. There are lots of choices to consider and it certainly isn’t going to be right for everyone. That’s why you must take advice before you can borrow.
How much equity can I access?
Firstly you can’t leave any mortgage left on your home. If you have paid it off great, but if you still have some left, the borrowing must pay off what’s left first, so this needs factoring in.
It also depends on your age. You can borrow more the older you are and you must be at least 55 before you can borrow anything.
At January 2024, if you are 55 you can borrow around 25% of your home value, at 65 35% and at 75 45%. These amounts change all the time. Higher interest rates means you can borrow less, lower interest rates more.
So someone aged 65 with a £300,000 home value may be able to borrow around £100,000. They would have to pay off any mortgage left with this also. If this is £30,000, they would be left with £70,000.
Therefore despite having £270,000 equity in their home, only £70,000 can be accessed.
“My home is my pension” may therefore not provide what is expected. It unlikely to provide all your retirement income alone, unless you have considerable equity and no remaining mortgage, but it can help make up shortfalls.
Advice
As equity release is borrowing and requires advice, advisers do not generally advise you to borrow until you have used up everything else you have.
This is sensible as why borrow money and pay interest, if you have money you can use already.
This may be true, but when it comes to long term retirement planning, we feel its really important for someone to know how much they could borrow at the start of retirement, should they need it to support their retirement income now or later.
This can give many people some peace of mind that they won’t be living in poverty in later years, or stop them from living a frugal existence just after retiring, when they really didn’t need to, if home equity can supplement other pension and non pension income.
How can Guiide help?
In our latest update, we can now work out for you how much home equity you may need at the start of retirement to remove any shortfalls which may occur later in your income plan. This will be shown with a new Solve (Home Equity) button in the Design and Test pages.
Then, if wanted, you can add this as a lump sum into your plan when you retire (or now, if you have already started taking money from your pension pots). If you add this in as you think you may choose this option, you can always remove this later if wanted in the Haves page or Dashboard.
You may be able and perfectly willing to access this amount at retirement through downsizing. If so, great. If not and you want to consider equity release instead, there will be a specific menu page in our Dashboard. If you do add some in the main journey, in the Dashboard, we can estimate the amount it may be possible to borrow given your age and home value (if you are already over 55). You can then see if this is enough to provide what you need.
Let’s be clear, we are not encouraging borrowing, or saying it is the right solution. We are just helping people understand if it can help solve any income shortfalls, how much may be needed and can that amount potentially be accessed if so.
