My House is My Pension

July 2017
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When discussing retirement planning we sometimes meet individuals who are relying on using their home to fund their retirement income to some extent.

This is usually in the form of downsizing to a smaller property or a cheaper area. This may work for some, especially if it has been a long held ambition to move to where there may be a significant difference in property prices.

Moving to a smaller property in the same area can also release some funds, usually not as much as a move further afield.

However there can be some downsides in making such a move and it is important to consider these too, so that the decision to uproot or not, can be one of choice rather than necessity.

Giving some thought to your desired lifestyle in retirement can avoid later regrets. For example, if children have left home a smaller house may be adequate for your needs. However if you want your children and grandchildren to visit and stay over, you may need to retain a couple of spare rooms to make this possible.

It is also likely that in retirement you will spend more time at home than ever before. Couples can find negotiating use of space in the home after retirement quite tricky. While one or both of you were at work all day, this was not an issue but suddenly you are competing for use of the spare room.

Before you commit to moving to somewhere smaller, it is worth thinking through how you will occupy your home when no longer tied to your work routine.

Moving home comes with associated one off costs; stamp duty, legal fees and estate agents commission being the main ones. Over time these may be recouped from lower energy bills and council tax costs, less maintenance and less housework and gardening.

There are also less obvious social costs, especially if you move to a completely new area. While this opens new opportunities to make new friends and new experiences, networks of friends and neighbours can take time and effort to rebuild.

In thinking through all the pros and cons of moving, it is worth considering two alternatives which could achieve an income or capital sum, without the upheaval of moving house.

Letting out part of your property

If you have a larger house you could consider taking in a lodger. Some retirees who do so find this not just remunerative but also a sociable way to make money.

Carol, a widow, lives in a large house in Oxford. She lets a room to visiting academics and mature PhD students, many of whom are interesting people who make good dining companions.

Jane from Bristol was left with a large mortgage when she was divorced and left with the family home. She felt keeping it was important for her childrens’ stability. Letting a room to employees of a local engineering firm has enabled her to keep the family home.

Under the rent a room allowance up to £7,500 can be received tax free if letting a room in your own home.

Equity Release

If sharing your home is not for you or you need a capital sum from your home, an equity release plan may be a good alternative.

Equity release gained a poor reputation in the 80s and 90s but has changed considerably since then. There are now considerable consumer safeguards attached to the terms of equity release loans.

These include:-

  • Fixed rate loan terms
  • A no negative equity guarantee
  • No requirement to repay the loan until death, sale of the property or going into permanent residential care
  • Options to move any outstanding loan to a new home
  • Independent legal and financial advice to assess suitability
  • Drawdown facilities, so that the loan can be accessed gradually
  • Options to repay capital and interest

Equity Release can therefore be used to release a capital sum or series of sums from the equity built up in your home. For many long term home owners this can be considerable.

There are no restrictions on what the capital is used for. This could include:

  • A gift to children and /or grandchildren to help them buy a house or for education fees
  • A sum to pay for adaptations to your home to enable continuation of an independent lifestyle
  • Home improvements
  • Purchase of a car
  • A holiday
  • A top up of your income

The loan will accrue interest which will be a debt against the value of your home, so it will leave less for you to pass on after your death. However it does mean that you can access some of the value built up in your home without the upheaval of moving house.

There may be times when property prices are falling, or you simply can’t sell, in which case it may be wise to diversify, and not have all your assets tied up in property only. 

Kay Ingram
Director of Public Policy, LEBC

Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. The Financial Conduct Authority does not regulate tax planning. Tax rates and allowances may change in future.

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