Over 65? You’re sitting on a £765bn goldmine!

How we pay for our lifestyles in retirement is back on the political agenda. All of the main parties have been looking at the issue in recent weeks, with the classic solution of encouraging people to build up their personal pensions and savings safety nets  constantly highlighted.

However, many pensioners are overlooking the goldmine you are sitting on – or more accurately, sitting in – which could release some serious cash and lead to a far more comfortable retirement:

Your home!

£765bn and counting

According to new research from equity release adviser Key Retirement Solutions, retired homeowners in the UK own property outright worth an incredible £765.18bn.

Let’s take a look at where that property is owned, and how much it’s worth:

OK, so there is a concentration of wealth in London and the South East, but even in the North East, property owned by pensioners is worth a whopping £30.41bn! That’s an awful lot of money many pensioners are sitting on, while scraping the pennies together to get by.

Annuity rates are dismal, the State Pension is on its last legs, and many of us simply aren’t saving enough to get by once we wave goodbye to the world of work. The idea of using an asset such as your home to help pay the bills is a sensible one, albeit one which produces emotive responses. So what are the options?

Downsizing

If you are sitting on a property worth a decent whack, the first obvious way to make use of that asset is to move to a smaller property.

Related goal

Get ready to retire

There are a lot of things to think about as you get closer to your retirement. But the early you start to prepare, the better.

Do this goal

The logic is simple – the smaller property is cheaper, therefore you make money out of the deal which can then be used to help you get by.

There are a few flaws though. From a practical point of view, there are additional costs associated with moving house which you can not avoid, such as solicitor’s fees and the like, which may make a small dent into your profits from the transaction.

However, more importantly for many older people, they love their home and are loathe to leave it, just for the sake of making a bit of money. They most likely know the area, know the people, and don’t want to take a step into the unknown, besides the fact that the smaller property may not have enough room for them. Similarly, a new property may not be affordable in an area near their family.

• Adopt this goal: Get ready to retire

Equity release

And now for the controversial option – equity release.

The industry has an abysmal reputation in some people’s eyes, due to the sins committed a couple of decades ago by some pretty nasty pieces of work who preyed on vulnerable pensioners and robbed them blind.

Thankfully, the industry has undergone radical changes since then, and is regulated by the FSA.

So how does it work?

You have two options – a lifetime mortgage and a home reversion.

The lifetime mortgage

With a lifetime mortgage, you take out a loan against the value of your property. However, you still retain complete ownership of your home.

In exchange you will get either a lump sum or a regular income, and the debt will only be paid off once the property is sold off (most likely after you have passed away).

What happens in between those two points varies depending on the type of lifetime mortgage you go for. There are various different versions including a rolled-up lifetime mortgage (where the interest on the mortgage is rolled up each year and paid off when the home is sold) and an interest-only version (you pay the interest on the loan each month, and the capital is repaid when the home is sold).

• Watch this video: Equity release is not dodgy!

The home reversion  

The key difference with a home reversion is that you do not retain complete ownership of the home. Instead you sell a portion (or even all) of your home to the provider, in exchange for either a lump sum or regular income.

You can carry on living there, and the reversion provider cannot sell the property until you die or move into care. However, you will need to pay some rent (usually quite small, though it varies) to the provider each month.

Value for money?

Just as with downsizing, there will be additional costs with equity release. Many providers only offer their products through independent advisers (and that can only be a good thing in my view), with the costs generally coming to around £1,500.

Hardly small change.

Equity release mortgages also rarely look too enticing, as they are priced slightly higher than traditional mortgages. There is also currently a depressing lack of competition in the market, due to the withdrawal of a number of lenders, due to a lack of funding.

And then there is the issue of the inheritance you leave to your children. These deals need to be repaid once you’ve died, which means you won’t be leaving your kids quite as much money as they may have been expecting. That’s definitely a conversation you need to have with them before you go ahead with an equity release deal.

An essential option

For all that, I still think equity release has an important role to play, particularly if you are a pensioner that is asset rich but cash poor.

There’s no point struggling to get by when you’re sitting on an asset worth a small fortune. It’s no replacement for traditional funding for retirement obviously – a decent pension is essential for example, and it pays to avoid this annuity mistake that many of us are making – but it fills a vital space in the retirement funding sphere. 

It is also a much safer option than previously, particularly now that almost all lenders offer a no negative equity guarantee and follow a strict code of conduct. As a result, no matter what, when you do pass on your surviving family won’t be left out of pocket.

Equity release will not be for everybody, but I think it can make a real difference to your standard of life in your twilight years. What do you think? Please let us know your views using the comments box below!