Many of us are finding that our pension pots need a little topping up, particularly after the financial turbulence of the last couple of years. But that can be hard to achieve. With loved ones often needing a little help, bills going up, and all the other financial challenges of modern life, finding extra money to put away for retirement isn’t always easy.
Of course, the State Pension will help with the basics, once you retire. But even if you top it up with a workplace pension, a self-invested pension plan or both, you might still be left without enough money to support your ideal lifestyle. So, like many others, you’re looking for another way to boost your retirement income.
Why are so many people looking for extra money for retirement?
The Pensions and Lifetime Savings Association (PLSA) suggests that, for a moderate retirement:
- A single person will need a pre-tax annual income of about £22,860.1
- A couple will need a combined pre-tax annual income of about £31,966.
To achieve that, the PLSA estimates that a single person drawing their State Pension, which in 2021-2022 is £9,339, will need an additional pension pot of about £270,000. A couple, both drawing their State Pension, will need combined pension savings of about £266,000. In both cases that’s assuming they buy an annuity of £5,000 per £100,000.
But the UK’s average pension pot size is just over £60,000.2
So, as many people approach later life, they start looking for ways of helping their pensions go further. Some of them want a little extra money, while others need a completely new source of wealth to combine with their pension. Equity release can help with this.
Alternatives to pensions
For younger savers, ISAs, LISAs and other investments that depend on the level of risk you’re willing to take, can be a good option. But they’re less practical when you’re nearing retirement, as it can take many years to save up a helpful lump sum.
That’s why many people aged 55 or older are looking at boosting their pension with equity release. It lets you borrow money against the value of your home or, by using a home reversion plan, sell part of your home in return for a lump sum. It’s becoming more and more popular to release equity for retirement income because:
- Equity release gives you a flexible, tax-free lump sum to spend
- It’s open to any homeowner aged 55 plus.
There may be cheaper ways to borrow money, but for many it’s a useful way to boost their retirement income.
Is your home worth more than your pension pot?
The pandemic’s created a lot of economic disruption. But house prices have stayed relatively buoyant. In fact, median house price values have increased by 24% since 2016.3
That’s had a big impact on the average homeowner’s retirement equity release possibilities.
For example, in March 2021, our customers across England and Wales could release on average £72,988 of equity from their homes. That’s just over £10,000 more than the size of the average pension pot. And because house prices have grown so much, it’s £5,000 more than they could have borrowed in 2020, and £14,000 more than they could have done in 2016.
That house price buoyancy is already having an impact on pre-retired homeowners aged over 50. 29% of them are either thinking seriously about or actively applying for a pension-boosting equity release.
16% of them will definitely use their property wealth to boost their finances, by taking out a lifetime mortgage or downsizing. Another 13% will draw on it if the value of their home has gone up enough.4
Who can use their home equity for retirement income?
If you’re a property owner aged 55 or over, you might be able to use equity release to borrow against the value of your home. The money you draw down is tax-free, and you can use it for whatever you’d like, supporting any pension or other income you’re getting.
There are two ways you can release equity from your home, without having to move out of it:
- You can take out a lifetime mortgage. Just like any other mortgage, it’s a loan secured against your home. You still own your home and can stay in it for as long as you’d like.
- You can take part in a home reversion scheme. That means selling all or part of your property for less than its market value. You stay in your home, but as a tenant.
If you’re looking to release equity through us, we only offer lifetime mortgages. Depending on the product you choose, you can release money and then either:
- Make regular interest payments as you go, again just like you would with most other mortgages
- Not pay any interest until the whole loan is repaid, which usually happens when you or the last surviving borrower die or move into long-term care.
What else can people use equity release for?
People usually use equity release to cover immediate costs, from paying off loans to travelling the world. Quite often they invest it back into property, using it to pay off their mortgage, make improvements to their home, or help their children get on the property ladder.
Covering that kind of cost by releasing equity is a great way to protect your retirement income – especially as you don’t need to repay the loan until you pass away or move into long-term care. Gifting money will affect how much inheritance you can leave, though, and the recipient may need to pay inheritance tax in the future.
Our customer Evadne helped her son put down a deposit on his new home. “The lifetime mortgage has ensured my son now feels secure,” she told us. “That is worth more than any money in the world. He texted me recently and said, ‘Hey Mum, now I’ve got my own place, would you like to come over for a cuppa?’ That’s what I wanted to hear!"
How do you start releasing equity for retirement?
You can only take out equity release through a qualified financial adviser, who will make sure it’s the right choice for you. They’ll cover topics like:
- Checking other options: They’ll help you see if you can borrow money in any other, cheaper ways, or pull together the sum you need without taking out a loan
- Avoiding negative equity: We and many other providers offer a no negative equity guarantee, so you’ll never have to pay back more than the total value of your home
- Protecting inheritances: Your lifetime mortgage will be paid back from the value of your home. You can choose to protect some of that value, reserving it for your beneficiaries.
When Evadne began to look into taking out a lifetime mortgage, she found the support we gave her very useful. “I spoke to a couple of financial advisers, and Legal & General kept coming up, so I contacted them. I’m really bad at paperwork, I hate reading contracts! But I was impressed that they asked questions: Did I know what I was doing? Did I know what a lifetime mortgage entails?”
How much equity can you release from your home?
You can use our Equity Release calculator to see how much you can borrow with one of our Lifetime Mortgages. If you’re one of the many people who are going to need a little more retirement income than what’s currently in their pension, equity release could be for you.
“It solved all my problems very simply, very easily, very professionally,” Evadne told us. “I feel secure in my home, I’ve no worries about money, and it enabled me to do something for my son that I couldn’t have done under other circumstances. If it’s something you need, then just do it. It’s very straightforward.”
1Retirement Living Standards recommended annual income for more financial freedom and some luxuries for a couple in retirement.
2Refers to average pension pot of a pre-retired person over 50. Opinium survey of 2,160 UK Over-50s in the UK who have not retired between 9 and 13 August 2021.
3Office for National Statistics, house price statistics for small areas in England and Wales: year ending March 2021, November 2021.
4Opinium survey of 2,160 UK Over-50s in the UK who have not retired between 9 and 13 August 2021.