My House is my Pension

My house is my pension

What do you do if your pension doesn’t look like it’s going to provide you with enough income when you retire? You either work for longer or look to your assets. If you are a home owner, one of your biggest assets is likely to be your house.

In an ideal world, no one should rely on their home over a pension to provide their retirement income. The value of your house could easily decrease, despite the continued upward trend of the past decades. Besides, you can never tell what the future may hold. You may need to re-mortgage or split the property if your marriage breaks down.

It is possible, however, for your home to help provide a regular income in addition to your pension. Let’s explore the options. 

Downsize

Selling up and moving to a smaller house is a great option if you have paid off all or the majority of your mortgage. Selling your home and buying a smaller property, or moving to a cheaper area, could give you a nice amount of extra cash from the profits of the sale to live off during your retirement.

Other benefits of downsizing

Moving to a smaller home could reduce your monthly outgoings too. A smaller property is going to use less energy and be much cheaper to heat.

As you get older, you may find it a struggle to get up and down the stairs. Downsizing is a great opportunity to consider future accessibility needs. It could make your life much easier in the long run.

Downsizing isn’t free

If you are considering downsizing, don’t forget to factor in the cost of moving. It’s not cheap to move home so consider doing it sooner rather than later. Whilst you are still earning would be ideal.

Let out a room

If you’re a social butterfly and don’t mind sharing your space, how about renting out a room?

Family homes have sentimental value which you may not want to trade in. But you could make any extra, unused space work for you by offering out your spare room to a lodger. You can control the rent you charge which will provide you with extra cash for your retirement.

How does it work?

By renting out a room you would become a residential landlord. Under the rent a room scheme you could earn up to £7,500 a year, tax-fee. A tidy little sum not to be sniffed at!

As a residential landlord you can enjoy perks:

  • Your tenant or lodger doesn’t have the right to challenge the agreed rent.
  • You can give less notice to end a letting compared to if you were letting out a whole house.

How much rent could you charge?

The amount of rent you can charge will depend on your area and the facilities you provide. For example, if you are renting a large double room with an en-suite you will be able to charge more than a small double with shared bathroom facilities.

It’s always a good idea to do some research of rental prices in your area. You could even ask a local estate agent for advice.

To give you a very rough idea, the current average for a double room including some bills is £90 per week, according to SpareRoom.com. 

Where to advertise your room

There are plenty of websites where you can list your room for rent. One, called MondaytoFriday, even allows you to only rent out during the working week, allowing the spare room to be free again at the weekends for visiting family.

By advertising your room through a reputable online site, you have the comfort of additional support, reassurance and guidance. 

What are your responsibilities?

If this sounds like a route you would like to explore you should bear in mind that there are some responsibilities involved on your part. You will need to make sure your home is, and continues to be, in good condition and is well-maintained. You will also be responsible for agreeing to and collecting rent.

Release equity

Downsizing or renting out a room won’t be for everyone. If you are over the age of 55 and own your home, equity release could be an option to get your hands on some cash. You won’t have to give up the memories of your family home, or share your private space.

You may have seen that all singing, all dancing advert on the TV promoting Equity Release. But what exactly is it? In the simplest terms, equity release is a way of unlocking the value in your property and turning it into cash.

How does equity release work?

The most common form of equity release is a mortgage which isn’t paid off until you pass away or you move into long term care. It releases a sum of money from the value of your home which could be used to help out your children, make home improvements or even go on that holiday of a lifetime! 

It’s worth bearing in mind that if you want to pass assets on to your family once you are gone, there will be less left over in your estate for them to inherit if you do release equity. Especially as, with the way interest is charged, you can end up paying back a lot more than you released from your home.

There are two main equity release products; a Lifetime Mortgage and a Home Reversion Plan.

1. Lifetime Mortgage.

This is a loan secured against your home which allows you to remain as the owner. You are borrowing some of the value at a fixed or capped interest rate.

Lump-sum: With the lump-sum Lifetime Mortgages, you don’t make repayments. Instead it is paid back, along with interest, from the sale of your estate once you die or move into long-term care.

The interest on these style Lifetime Mortgages accumulates over the years that you have the mortgage for. This means the amount you owe will continue to increase until your house is sold.

Drawdown: A ‘drawdown’ version of a Lifetime Mortgage is also available. It’s more flexible than the lump-sum variation which means you have the option of adapting it to any changes in your life. It allows you to take an initial chunk of cash (from an agreed upon overall sum) with the remainder left in a ‘cash facility’ which you can then access as and when you need to.

The interest is added to the money you have drawn down rather than the overall sum you have borrowed. Some drawdown mortgages even allow you to pay back the interest so you can reduce the overall cost.

2. Home Reversion Plan.

With a Home Reversion Plan, a provider will pay you a lump-sum for a proportion of your home. When it is sold, once you have passed away, the proceeds of the sale are split between your estate and the provider based on the proportion you both hold.

The value of the proportion held by the provider will be below market value because of the time they have to wait to get their money back.

Here is an example from the Money Saving Expert website:

“if you sell a 40% share in a £200,000 property in return for a lump sum of £40,000, this cash you receive is at a huge discount to the £80,000 it is actually worth (at current market prices)… If your home is eventually sold for £300,000 [after your death] the provider would be entitled to £120,000 – 40% of the proceeds.”

Take advice

Whichever path you may want to go down, you need to make sure it will work for you. Equity release, in particular, is a complex financial product. It will reduce the value of your estate and may affect your entitlement to state benefits, so independent financial advice is key.

There’s nothing more disappointing than being in a worse situation after taking action to try and live more comfortably. Get in touch with us today if you are considering using your home to supplement your pension.   

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