Large numbers of us are simply not putting aside an adequate amount for our retirement. And the latest statistics reveal 35 per cent of workers in the UK do not have a pension.
These findings, uncovered by Prudential, mean that well over a third of working adults will therefore be relying purely on the State Pension when it comes to retirement.
Even those who are saving for a pension are starting to realise there is unlikely to be enough in their pot to fund retirement.
Retirement specialist LV= has just reported nearly half of people approaching retirement are considering alternative sources of income because stock market volatility is threatening their pension funds.
As a result people are starting to turn to their properties to help them financially when it comes to retirement. LV= said a third of over-50s plan to use the equity in their home to help supplement their retirement income.
These people are now being dubbed the “HIPpies generation” – Home Is Pension.
There are several ways you can use investments in bricks and mortar to boost your income, but which is right for you? And is it safe to rely purely on a property to pay your way through your latter days?
We’ve taken a look at the pros and cons of using property to fund your retirement.
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Equity Release
According to the research by LV=, one fifth of the over-50s surveyed were considering an equity release product to access equity in their homes.
For anyone who is unfamiliar with this market, equity release is a way of quite simply releasing some of the money tied up in your home without the need to move out or downsize.
For many older people who do not plan to use this equity to, for example, make another house purchase this kind of move makes perfect financial sense.
However, it does come at a price.
There are two kinds of equity release product out there – lifetime mortgages and home reversions.
Lifetime mortgages, the most popular, involve the homeowner taking out a loan secured against their home. The repayments are taken from the money made on the sale of the home when the owner dies or goes into a care home.
They’ll retain full ownership of their home but obviously there will be less money for care home fees or inheritance.
Home reversion involves the homeowner selling all, or a percentage, of the property for a lump sum. The owner can remain in the home, and the provider can only sell their part of the home when the owner dies or goes into care.
The reversion provider takes legal title of the property; any remaining share belonging to the owner is protected by a declaration of trust.
The share of the property the owner retains will remain the same value, regardless of changes in property value.
Peter Welch, head of sales and distribution, for Bridgewater Equity Release, said: “Home reversions work particularly well if the client wants certainty, especially in an environment where house prices are volatile and falling.
“Selling a proportion of the home now accesses the value of that home right now, rather than waiting to see what house price levels will do.”
Homeowners can also usually draw down more equity at future dates until their entire home is sold.
Both types of equity release have their critics. Indeed, the disadvantages of this method are that interest rates are charged on equity released, there are penalties if you decide to sell your property, and you may find there are restrictions on how you can use your home.
Stephanie Hawthorne, editor of Pensions World, said it should only be used as a last resort.
“It can be complicated and expensive,” she said. “It may also affect your means tested benefits and can also restrict your future flexibility and of course there is less to leave to your heirs.”
If you are wavering it might be a good idea to seek independent financial advice before jumping into equity release.
Age UK runs an Equity Release Advice Service which provides an adviser to speak to potential customers to gain an understanding of their circumstances or needs.
They’ll carry out means-tested benefits assessments and provide advice on whether equity release will affect potential customers’ tax status or affect their state benefit entitlement and then provide advice on equity release plans available.
Gordon Morris, managing director of Age UK, said being more aware of how income could be released from their assets could mean people were better able to enjoy their retirement.
He said equity release was one financial option, and added: “While not right for everyone, it is a means of releasing some of the value of a house and immediately improving finances without having to move home.”
“It is,” he added, “one way of ending the situation of being asset rich but cash poor in your later years.”
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Downsizing
For many future retirees the option of selling their big family home and purchasing a smaller property costing significantly less is the obvious way of releasing equity for retirement.
This works well if you own your home outright. But if you are still paying a mortgage, downsizing can help by reducing the repayments.
On the plus side this can be incredibly economical. When children grow up and move out, a couple are likely to rattle around in a large three or four-bedroom house and the cost of heating and maintaining larger properties can add extra budgetary burdens during retirement.
Of course there are down sides to downsizing too. You’ll need to consider the cost – and stress – of moving house. And of course you will have less money to pass on to your descendants – a disadvantage you’ll get with any method of releasing equity.
On a more practical note, finding places to store furniture can be difficult and if you are not willing to part with your belongings you’ll need to consider storage costs.
There are critics of this method with some warning that downsizing is not the answer if you are looking for a financially secure retirement. Standard Life conducted an investigation last year which revealed this method of releasing equity was becoming less lucrative.
On average, its research found, downsizing a home in the UK provided only £43.50 a week retirement income in 2010, compared to £53.40 in 2008.
Andrew Tully, senior pensions policy manager for Standard Life, said: “People pinning their retirement dreams on downsizing their property will be in for a shock.
“A combination of a fall in house prices and annuity rates has dealt a double blow to many, with the average pension pot from downsizing only providing £43.50 a week income.”
The message is, while downsizing is not a bad idea, relying on it as an alternative to a proper pension is dangerous.
Mr Tully added: “Banking on downsizing to generate sufficient income is a potential retirement disaster unless you have also made provision elsewhere.”
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Other methods
There are other ways of using a property you own to help you through retirement. If you own more than one property, renting one of them may be a good solution provided the rental yield is strong enough.
Indeed if you have the energy and time using any money you have to invest in property to develop and sell on at profit could also be another method. With these routes, it’s essential to do plenty of research and both will require a lot of forward planning.
Indeed, whatever method of using your property to fund your retirement you plump for it would seem planning and research are key.
And your property should not be relied on to provide the entire income stream during retirement – having provision elsewhere whether through a company or personal pension is really important.
Ros Altmann, director general of Saga, summed it up. She said: “Many people have no idea what their pension is likely to provide until shortly before retirement, at which point it is often too late.
“If they have not saved and cannot continue working, they need other sources of finance. So it’s no surprise people are increasingly relying on their house to help fund their retirement.
“Downsizing and releasing equity from homes is a trend we predict is likely to continue for many years to come.”
But, she added: “The most important thing is to plan ahead and identify how you will be able to fund the lifestyle you want as you get older.”
Use the Myfinances.co.uk comparison tables to find the best deal on a pension or annuity
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