March 2008

Into the home straight

Hands up those of you who know what your pension is likely to be when you reach retirement? Now, how many of you know what you'll actually get after you've taken your maximum tax-free cash sum, catered for some form of widow or spouse benefit and allowed for regular increases to cover inflation so that it grows in value each year?

Thought so - not many of you. If we, the financial experts, have difficulty trying to fathom what our own pension contributions should be to provide a reasonable level of income in retirement, then it is no surprise that most of our clients don't have the foggiest idea or even know where to begin. This conundrum is one of the main reasons why so many people continue to bury their heads in the sand and put off the day they should be talking to their financial adviser about pension planning. That is until it's too late or nearly too late.

A-Day changes have made pension planning more flexible and intelligible. However, they haven't helped the calculation of future benefits. As for those clients who have accumulated numerous pensions with previous employers, particularly within defined contribution schemes, the nightmare of calculating their pension income is made even more daunting.

This, of course, is just the start of it and while I wouldn't pretend to be an expert in this market, it does shed some light into why so many people have no idea what they will live off in retirement and why they delay making a decision about it. They are left with some harsh choices, such as: can I live off of the state pension alone; can I afford to retire or should I continue to work; perhaps I shouldn't retire, assuming my health and employer will allow me; what other alternatives do I have?

Using equity release

The answer is in fact becoming clear to an increasing number of people - equity release. With most homeowners acknowledging throughout their working life that their home is their main asset, it would seem logical for them to capitalise upon its value in order to improve their lifestyle in retirement.

One of the recent consequences of the housing boom has been to position property as an asset class in its own right and for it to be seen as one of the investment pots we can use upon retirement, along with pension savings and other accumulated wealth. This ignores, of course, anything one might receive from the State pension although this should be seen as an added bonus. Certainly no one should be relying on the State pension to actually live on in retirement.

How many times have we read or heard of someone giving up on their pension or worse still not even thinking about taking one out because they believe property will be their pension whether that is their buy-to-let or the house they are living in. It is never wise to put all your eggs in one basket and we now appear to be witnessing a return to normal long-term house price inflation instead of the unprecedented growth we have witnessed in the last decade. In this more uncertain outlook for property prices, it is appropriate for those in or approaching retirement to diversify some of their property wealth into alternative investments.

According to the Department of Communities and Local Government the average house price is now almost £220,000. Even for those who are fortunate enough to have accumulated a healthy pension pot by the time they reach retirement, their property is still likely to be their largest asset. More and more of us are beginning to investigate the merits of equity release schemes in order to gain access to the cash locked up in our properties, thus enabling us to enjoy a better retirement whether that's improving one's income in retirement or releasing equity and thereby enhancing the enjoyment of retirement.

Pension drawdown is a useful method of providing retirement income for those who have sufficient funds to make it economic and worthwhile. Drawdown enables people to defer annuity purchase and take advantage of tax-free cash while keeping their scheme assets invested.

Releasing cash from the home via a regulated bona fide equity release scheme is not so different in that funds can be drawn down as required on a tax-free basis, and ownership of the home can be maintained wholly or in part. It is now possible to commence with a drawdown as small as £10,000 and have a cash reserve to draw upon as and when needed.

As more and more of us enjoy the benefits of living longer, the strain of enjoying retirement will only be unleashed by tapping into our largest asset class - our homes. Equity release schemes are available to anyone over 55 who own their own home, not just the lucky ones who reach retirement with a better than average pension fund and who have retirement options beyond the reach of the majority. Now is not the time to put off paying into a pension - but lets not forget bricks and mortar is not a bad investment over the long term and there are now innovative ways of extracting its value in retirement.

Simon Little
Business Development Director
Home & Capital