Who should use housing wealth in retirement? That, unfortunately, is not the right question to be asking as the reality now is that only a minority don’t need to consider it.
There are three main ways to use housing wealth in retirement and each has its advantages and disadvantages. They are:
- To downsize. This is a phrase which is often used in a variety of ways in a retirement housing sense. It includes moving to a smaller retirement home or moving to a smaller home in another region to be closer to family both of which could cost more than the home you are leaving. I use it to mean moving home to release a lump sum with the possible bonus of smaller, ongoing living expenses.
- Equity release which enables the individual to remain in their home and incur no additional ongoing housing expenses.
- Retirement Interest-Only mortgages (RIO), which will release a lump sum but will result in additional ongoing expenses to meet the interest repayments.
A financial adviser dealing with pensions and investments will consider the client’s objectives, attitudes to risk, and capacity for loss before presenting a recommendation. When it comes to the use of housing wealth however softer issues come into play. The family situation, emotional attachment to the home, and what they wish to pass onto future generations need to be considered fully by the individual and their adviser(s).
70% of pensioners own their home. This means a minority who are not homeowners are unable to consider using a home to finance their retirement. It is unlikely many in this group have saved enough in their pensions to finance their retirement. Royal London estimates that on average they will need £180k just to pay their rent during retirement.
Those with large amounts of wealth outside their home can probably survive adequately without being forced to draw on the equity in the home. That is until they begin to give thought as to how they will pass on their accumulated wealth and reduce potential inheritance tax bills. They may find themselves needing advice to either:
- Use equity release to pass on part of their estate to their children or grandchildren early, (the housing inheritance tax allowance does not apply to all who may be regarded as children or grandchildren); or
- Release equity from the home and defer drawing on their pension, using the pension death benefit rules to defer payment of tax and maybe reduce the rate at which it is eventually paid.
It should be remembered only 4% of estates currently pay Inheritance Tax. This could partly be because of successful estate planning; it is often referred to as a voluntary tax.
Of the remaining pensioners, how many have sufficient pension savings to fund their retirement spending? Data indicates that very few have. We should also not forget that retirement spending is a very personal matter. For some, if the money is available it will be spent. Others live in fear of running out of money. Help is needed at both of these extremes.
The former need to understand, although their housing wealth is there to help fund their spending habit, they must realise it is not a bottomless pit. The latter need to understand, just because they are retired with insufficient pension savings, they do not have to live in relative poverty. They can afford to enjoy themselves more.
When advising on pension income, if the individual has inadequate pension savings, the advice is incomplete if it does not include options with regard to housing wealth. This has to some extent been understood by the new Single Financial Guidance Body which will be signposting equity release from now on.
From an adviser point of view if you are going to provide a complete range of retirement options to your client, housing wealth must be included.
Bob Champion is chairman of the Later Life Academy (LLA)