Around 85,000 people released equity from their homes last year, says finance expert Peter Sharkey. Could doing the same help you to increase your retirement fund?
Anyone preparing a personal cash-flow projection over the past few months will probably have required a stiff drink by the time they had finished.
There’s little consolation in knowing that, when it comes to cash-flow, millions of other people find themselves in the same boat, a situation unlikely to improve for the foreseeable future.
Hundreds of thousands of workers currently protected by the furlough scheme could soon find themselves unemployed. Indirect victims of the Coronavirus they might be, but their plight is serious as many are currently living, at least in part, off rapidly-diminishing savings.
Admittedly, the government had no alternative but to effectively underwrite 80% of the salaries of people by introducing the furlough scheme, but the scale of this commitment, even though it will reduce over the next four months, is so enormous, no-one knows how much it’ll eventually cost.
And while it was fantastic to see so many businesses re-open this week, millions more need to follow suit before the economy, which had almost ground to a halt, can struggle into first gear and we can begin considering how we are to settle the enormous costs we’ve incurred since March.
Against this rather gloomy economic backdrop, let’s return to that personal cash-flow projection. It’ll have proved a sobering exercise for those within five or ten years of retirement and particularly worrying for folks who have already clocked off for the last time.
I fall into the former category and had intended getting to the ‘wind-down’ stage of my career over the next few years, but as my pension pot plummeted by almost 20% in the wake of the virus’s spiteful impact, I’ve had to put some plans on hold. Granted, I expect the pension pot to eventually recoup the gut-wrenching losses it’s suffered, but that could take some time.
In truth, I’m lucky as not everyone has been able to work while waiting for their pension to be replenished; many people could finish their furlough period and find themselves out of work, while others, as I’ve noted above, had already finished work for good before the Coronavirus reached the UK. Which brings me to equity release.
Over the past couple of years, I’ve regularly received emails from readers regarding equity release, but in the space of less than three months the numbers have soared; I’m now receiving dozens every week, almost all from people wishing to improve their recently decimated retirement finances.
For some, equity release could provide a timely answer.
Most homeowners aged 55 and above may withdraw a percentage of the value of their home, effectively releasing property wealth accumulated over many years. How much they can withdraw depends upon several factors, including age, health and property value; significantly, perhaps, the funds released from the property, which can be taken either as a lump sum or as regular withdrawals, are tax-free.
Equity release is becoming an increasingly popular alternative to selling the family home, downsizing and pocketing the cash difference. Last year, around 85,000 people released tax-free funds from their property.
To date, most people have used their ‘hidden savings’ in a variety of ways: by giving their children a leg-up onto the property ladder, improving their homes or paying off an interest-only mortgage.
More recently, however, evidence suggests a sizeable number are planning to use the tax-free funds to boost their retirement finances.
Lifetime mortgages approved by the Equity Release Council remain the most popular means by which equity is released. They’re accompanied by a no-negative-equity-guarantee which ensures homeowners’ heirs do not inherit any related debt.
In addition, homeowners retain full ownership of their property, either until death or admission to long term residential care, after which the property is sold to repay the lifetime mortgage.
It’s worth noting that releasing equity from your home could have an impact upon your entitlement to means-tested state benefits and reduce the value of your estate, so taking professional advice before committing to the process is essential.
Equity release isn’t for everyone, but if, after conducting your own cash-flow exercise, you’re feeling a little concerned, it might be worth exploring, not least to understand the process and its implications and to determine whether it’s right for you.