Could your property boost your retirement fund?

Property is increasingly being seen as an asset that’s vital for funding retirement. It’s no surprise, after all, our homes are often one of the largest assets we have, but what are your options and the drawbacks of doing this?

The value of property has grown enormously over the last few decades. If you’re approaching retirement now, you’ve likely benefited from this at some point. According to figures from Nationwide, the average home cost £59,534 at the beginning of 1989. Over a 30-year period, it increased to £212,694. As a result, property has become an integral asset to consider when planning for retirement or thinking about how you’ll pass your estate on to loved ones.

Property and retirement: A growing trend

Some retirees are already exploring how they can use property wealth to enhance their lifestyle and supplement other financial provisions. Research suggests it’s a trend that’s set to continue. According to analysis by Canada Life younger generations are three times more likely to plan to use property wealth to fund retirement:

  • Almost one in ten (9%) people aged between 16 and 54 expect the wealth stored in their homes to be their main source of income in retirement
  • This compared to just 3% of those aged over 55

Alice Watson, Head of Marketing and Communications at Canada Life Home Finance, said: It is good the younger generation recognises that they can unlock wealth from their property in retirement. This openness is likely driven by the reality that many under 50s will receive less generous pensions under the Defined Contribution scheme, compared to the majority of the older generation on the Defined Benefit plan.

Notably, the research also illustrates the evolving profile of retirement income, and lends further weight to the argument that Equity Release is moving into mainstream financial planning.

The findings suggest the majority of over 55s are confident in their financial security. Half believe their State or Workplace Pension will provide sufficient income, whilst one in five are relying on savings. However, with 21% underestimating how long they’ll live for, more could be reliant on property wealth than expected in the future.

What are your options?

With a significant portion of your wealth likely locked in property, it’s natural to wonder what you can do to access it should you need to.

One of the most obvious answers here is to downsize. Selling your home to purchase a cheaper property to spend retirement in can free up some of the investment you’ve made in property. This used to be the traditional route retirees went down. But what if you can’t or simply don’t want to move? Or what if downsizing wouldn’t release as much capital as you need?

Equity Release is an option that more retirees are choosing. There are several different types of Equity Release products, but they typically allow you to take either a lump sum or several smaller sums though a loan secured against your property which you pay interest on. This money is then repaid when you die or move into long-term care, as a result, you don’t usually make payments to reduce the loan during your lifetime, though some products allow you to pay off the interest.

Equity Release can seem like a fantastic way to fund retirement, but there are some crucial things to consider; it isn’t the right option for everyone.

  1. As you don’t usually pay the interest, the amount owed can rise rapidly
  2. Accessing the equity may mean you’re liable for more tax and affect means-tested benefits
  3. You may not be able to move in the future or face a high cost for doing so
  4. Equity Release will reduce the inheritance you leave behind for loved ones
  5. You will not be able to take out other loans that use property as security

Before you look at Equity Release products it’s important that you explore the alternatives to ensure it’s the right route for you. There may be different options that are better suited to your circumstances and goals.

Building a retirement income that suits you

Whilst property wealth is set to play a growing role in funding retirement, it’s important that other sources aren’t neglected. Retirement income is typically made up of multiple sources and may include:

  • State Pension
  • Workplace and/or Personal Pensions
  • Investments
  • Savings
  • Property

Choosing property over contributing to a pension can be tempting if retirement still seems far away, especially when you factor in property growth over the last 30 years. However, once you consider tax relief, employer contributions and investment returns, as well as tax efficiency, pensions should still play an important role in holistic retirement planning.

If you’re starting to think about retirement, whether the milestone is close or you want to understand how your current contributions will add up, we’re here to help. We’ll work with you to help you understand the different income streams that could provide a comfortable, fulfilling retirement that matches your aspirations.