Angus is 67-years-old. He has had a successful career and in his 50s he received sizeable inheritances. I would say he is very wealthy. His home is worth £2.5m. In 2006 due to the value of his pension benefits being in excess of £1.5m he applied for protection on the introduction of pension simplification. He has yet to draw on any of his pension benefits.
Angus holds two non-executive directorships that pay him £30,000 a year. He also has non-pension investments worth £2m that generate income of around £60,000 a year. Not surprisingly he has no debts.
Sophia is also 67. She considers herself to be comfortable. She owns her home which is worth £300,000. She has only just stopped work and in addition to her state pension has a pension pot worth £8,000.
Mike is 65. A lifetime of heavy manual work, many years of which were spent working outside the UK, are beginning to take their toll. He cannot wait to reach state pension age when he intends to retire. He has a pension pot of £15,000 mainly accrued while being contracted out of the state second pension and nothing else. He always looked upon homeownership as his security and owns a home worth £200,000, however, he still has £25,000 owing on his mortgage.
You can decide for yourself what the most important advice objectives should be for Angus, Sophia and Mike. One thing they all have in common, however, is that, despite the differences in their wealth and situations, each will have to give consideration to their housing wealth when planning their retirement finances.
Angus, is probably more concerned about estate planning than generating more income to maintain the lifestyle he enjoys. The solutions he uses will determine whether he draws down his pension or passes it on to his dependants. When it comes to investments his risk tolerance is high as would be his capacity for loss. Seeing he is over the limit for residence nil rate band, would he consider taking money out of his home through equity release and passing the proceeds to his dependants rather than pay large inheritance tax bills?
Sophia could draw around £3,000 a year from her pension savings for the remainder of her life with a high probability of not running out of money. Add that to a state pension of £9,000 a year and she has an income of £12,000 a year. Will that be enough? Only Sophia can answer that question.
If it is not, then she will have to call on her housing wealth. If she does, how much should she anticipate will be raised? That is easier to estimate with equity release. But when should it be anticipated that she should apply for an equity release plan?
If she is going to move to a lower value house, when and how much will she realise after transaction charges? How will these decisions impact upon her pension drawdown strategy?
Mike may be advised to draw the tax-free cash from his pension to pay off some of his mortgage. When he reaches state pension age, he may be entitled to pension guarantee credit. If he is, the amount in his pension will be used to create a notional income that will be offset against the amount he will receive. Also, he should avoid paying unnecessary income tax.
When he retires Mike may also qualify for support from mortgage interest relief. This would be similar to equity release. The mortgage interest received would become a loan to which further interest is added with the total being repayable when the house is sold.
But does Mike want to be subject to having his income dictated by the state? Should he be looking at taking some equity from the house to repay the balance of his mortgage and possibly increase his standard of living?
Three retirees with entirely different amounts of wealth. Just scratching at the surface means that they need advice and guidance on combining housing and pensions wealth to get the best out of their retirement. The above can be complicated by what their partners bring to the party. What pensions and other investments do they have?
Mike’s partner may be younger and working. Pension guarantee credit is not now payable until the youngest partner reaches state pension age. Also, pension guarantee credit is based on a couple’s income so Mike’s partner could completely change the solutions available to Mike.
The Association of British Insurers has created a debate by publishing a paper calling for more individual guidance being made available using pensions in retirement. This assumes that retirement is all about pensions. It is not.
My view is that PensionsWise should be a retirement guidance service educating those approaching retirement on their options and signposting where to go to obtain specialist advice.
However, this also illustrates that all the advice later life customers receive needs to be well-rounded, and advisers need to have knowledge of everything that may affect their client’s finances. Ask yourself this question – do you meet this particular brief? If not, then why not?
Bob Champion is chairman of Air Later Life Academy