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Many individual’s main asset is their home, but what you may not know is that it’s relatively simple to make your property wealth work harder for retirement planning purposes, explains Andrea Rozario, Chief Corporate Officer at Bower Private Clients.
Planning for retirement has been transformed with new pension freedoms sweeping away all the old certainties about how pension funds can be turned into an income. People now have wider choices about how they invest and spend their money.
Everyone aged 55-plus has complete freedom over how they use their retirement savings, subject only to tax, ushering in a new era of flexibility. Association of British Insurers’ data shows more than £6 billion has been taken out of pension funds in the past year as savers have embraced the ability to choose.
Property wealth and pensions
Property wealth is a major part of the mix for people planning how to fund their retirement, not least because the one thing that pension freedoms can unfortunately not do is create wealth. For the vast majority, their home will be worth far more than their pension savings and that one simple point is driving innovation and interest in the equity release market.
Our analysis of Land Registry data highlights the importance of property wealth and the role it can play in raising standards of living in retirement. In the past five years alone, more than £63 billion has been spent in England and Wales buying homes for cash. More than 7,200 people a year are spending £1 million or more on properties without the need for a mortgage with the average price around £1.75 million.
More than 110,000 homes have been bought for £1 million or more in the past five years, with 67% using mortgages to fund their purchases. They will in time pay those mortgages off and own outright an asset worth considerably more than £1 million depending on the housing market.
Property rich; cash poor
Clearly people who are able to spend £1 million-plus in cash on homes may have other assets, but just as clearly many will have most of their wealth tied up in their home and when they come to retire will value a way of using that asset.
Equity release is already a £1.6 billion market, but is set for major expansion as people come up to retirement and look to their homes to supplement pension funds. Essentially, equity release enables homeowners aged 55-plus to borrow money against the value of their home which they do not need to pay interest on, unless they choose to, or repay until they die or move into a care home.
Cases we have seen have included clients releasing £1 million-plus to help adult children buy their own homes as well as to fund home improvements and provide money for day-to-day living.
The equity release route
Increasing numbers of retired homeowners with homes worth more than £1 million who need more complex advice on property and legal issues are looking for equity release solutions. They want to remain in their homes but cannot raise money through standard mortgages, generally because the mainstream lenders do not lend into retirement.
The continuing squeeze on pension and investment income means some property millionaires may find themselves in a position whereby they have the desirable home which they love, but not the level of income or liquid assets they had hoped for. Consideration of how best to maximise what will likely be their biggest asset should include solutions such as a lifetime mortgage.
They may need specialist underwriting as more expensive properties can be problematic and may need specialist surveys and innovative solutions. Our advisers are able to provide individual discretion on rates for plans which can be personalised and structured to meet client needs which may include advice on wider considerations such as the impact of future changes and the impact on inheritance tax as well as restructuring finances.
Wealth managers and other professionals such as accountants and lawyers are seeing increasing demand from their clients for financial advice – our research shows 36% of accountants had experienced an increase in demand for advice about personal finance from clients in the past 12 months with help on inheritance planning one of the major sources of inquiries. The same applies to lawyers with 38% of law firms reporting rising demand.
That demand however is causing concern – 31% of accountants say they are worried that some of the advice they are giving goes beyond their core expertise while one in five lawyers are worried about the advice they are giving.
The wealth tied up in homes is a potential source of retirement funding but people need to be properly advised. Equity release is ultimately not a complicated product, but the decision on whether to take out a plan can be complicated.
Customers need to understand all the risks before taking out a plan and then balance that against their existing needs and any potential future needs. Without a crystal ball, that will be a complex balancing act.
They need to be able to make informed decisions and have a complete and full understanding of the pros and cons at the outset so they fully understand the nature of the plan.
Specialist advisers can of course help guide individuals through the process and source the most competitive deals for their circumstances. But the customer makes the decision and it needs to be the right one for them.
Making big decisions about your family home shouldn’t be taken lightly and is just one of several major financial issues you should always discuss with a professional adviser well ahead of time. To start the process of finding the right wealth manager for your profile and needs, simply try our SMART ONLINE TOOL. Or, if you would like to discuss your situation with our straight-talking team, please do GET IN TOUCH HERE.
