Equity release in retirement; supplement your pension

When nearing retirement we face the challenge of ensuring our funds will last. Increasing numbers of UK homeowners have been looking for alternative methods to increase their income in retirement and are turning to their property to supplement their pensions.

According to research from the Equity Release Council (ERC), ‘Social and financial trends mean that older age groups have become the biggest owners of property today, and the most dependent on its contribution to their overall household wealth. This is significant given the financial challenges facing our ageing population as they seek to live longer, healthier lives. Many have made inadequate funding provision for their retirement and care needs, to the extent that fewer than half (43%) of adults aged 45+ expect to have a “healthy” financial situation when they reach state pension age.’

Over time it’s likely that the percentage of our wealth tied up in our homes will increase as our income reduces and our liquid assets are spent. A new report from ERC revealed how homeowners – particularly those aged 45 to 64 – are reassessing the traditional roles of property, and considering their use to improve their quality of life in retirement.

What is equity release?

Equity release allows homeowners to receive a cash lump sum as a loan based on value of their property. This loan usually does not require repayments, and unpaid interest is added to the loan. This loan does not need to be repaid until the policyholder dies, or moves into care – allowing them to continue living in their home. However, it’s important to understand the effect releasing equity will have, as it will reduce the value of your estate, and may affect your entitlement to means tested benefits.

To protect policyholders, a ‘no negative equity guarantee’ is available from members of the Equity Release Council, meaning that the lender cannot take more than the value of the property upon the death of the homeowner or when they move into care. However, some plans allow you to pay all or some of the interest, preventing the debt from increasing.

Where does financial advice come in?

As equity release is effectively a debt that affects the value of an asset, it should be factored into overall financial planning considerations. It’s also a specialist market so many financial advisers, including Wren Sterling, will refer enquiries to a third party.

Estate planning and inheritance tax are impacted if someone chooses to release equity from their home. It can reduce the value of an estate and become a nasty surprise for the person who ends up dealing with probate.

Alternative retirement plans

The average age for those releasing equity in Q1 2019 was 71, suggesting that equity release is being used to open up opportunities and allow retirees to fund the retirement they want.

It is clear that opinions around equity release are changing as sales of equity release plans increased 6.6% for Q1 2019 compared to the previous year. Rather than being used to pay debts or bills, research showed that the most popular uses of equity are to improve quality of life through home improvements and holidays.

Although equity release certainly can aid cashflow requirements if someone is “asset rich and cash poor” but it’s questionable whether a financial adviser would recommend equity release as a means to finance holidays or home improvements as there may be other assets more suitable for making these payments, so it’s always worth checking. Remember, there is interest payable on equity release that may be at a higher level than alternative funding methods.

What are the risks?

Equity release will not be suitable for everyone, but it could be worth considering for homeowners looking for alternatives to downsizing or loans. However, as equity release cannot be reversed easily and there may be penalties for attempting to repay the loan and end the plan early, borrowers should think carefully before applying for equity release – and consider taking advice on their succession plans.