Living on property, not just in it

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Unsurprisingly, most of the focus has been on pensions and how best to take benefits. There has been a reported rapid swing away from traditional annuities towards more flexible drawdown arrangements as people seek to access capital, higher income levels and the perceived better value they may deliver.

Of course, one thing the chancellor could not change was that people retiring today are pretty much the same type of people as those retiring before the budget watershed. Many had not saved enough in their pension to provide the desired level of income required. Despite an increasing level of interest in pensions, for those at retirement now it is too late to accumulate any further savings.

What can retirees with insufficient pension funds do? Some will continue to work, whilst others use savings if they have them. However, some using their new found pension freedoms may choose to withdraw higher amounts using income drawdown than is sustainable over the long term. This will certainly overcome the low annuity income levels or the GAD maximum under capped drawdown. However, high withdrawals will increase the risk that their fund will run out before they do. However, there is an asset that many fail to consider for retirement planning, namely property.

In many cases, property is the largest asset owned by an individual, followed by their pension fund. Property is not routinely considered during retirement planning. It would be interesting to compare the investment performance of their pension over the last 20 years to the increase in property values.

Downsizing can be an attractive way of releasing equity from a home, providing money the homeowner needs to live on through retirement. However, for many, selling the family home is impractical, expensive or too laden with emotional considerations.

Equity release is an alternative way of freeing up funds for retirement. Over many years, equity release has improved, through the products available, regulation, professionalism, reduced costs and improved transparency. However, it has generally been used for funding a capital plan like home improvements, cars, holidays and other spending. It is also increasingly used to convert interest only mortgages homeowners haven’t repaid by other means at the point of retirement.

Property assets should form part of wider retirement planning. Many are using equity release several years after retirement. Their retirement and the subsequent use of equity release were unconnected planning events. We increasingly consider all our assets as ‘just money’ to call upon, whether wrapped in an ISA, a pension or indeed bricks and mortar.

For those retiring today, equity release should increasingly become another way of accessing their tied-up capital to further fund retirement, and should be a proactive consideration at the point of retirement. When an adviser sits down with a client to plan their retirement, they will usually account for their clients’ pension funds and investments, and note their property value. Previously, retirees had to accept the low level of annuity income or restricted withdrawal from income drawdown even if it did not meet their income needs or aspirations. With unlimited drawdown, they could consider drawing a higher level of income in the knowledge that it may well be unsustainable, but would meet those income needs.

People could take that decision proactively by considering how their property wealth could be called upon to support retirement income. That could include a plan to downsize or arrange for equity release. Even accounting for the tax on pension withdrawals, a pension pot could be used to fund capital spending instead of equity release. Equity release may then be used later in life over a shorter period of time for interest to roll up on the lifetime mortgage. Like the increased use of drawdown, equity release is not without risk or cost and won’t be right for everyone. However, it should increasingly be considered as another planning option when establishing how to fund retirement income for the long term.