By Martin Williamson, Head of Residential Property, Latimer Hinks Solicitors www.latimerhinks.co.uk
Traditionally, anyone nearing retirement would have felt reasonably secure in the knowledge that they had a comfortable pension fund and, if they were lucky, enough to be able to put some additional funds aside. Nowadays, pension funds are being squeezed, the state pension is no longer fit for purpose, and savings and investments are at an all-time low. Many older people can no longer count on security post-retirement and are instead increasingly viewing their home as a nest egg.
Many people approaching retirement have to look again at how they are going to fund their retirements. One in four home owners now have no option but to rely on their property "to generate an income for their old age, as they have no pension at all, or, at best, one that is worth a paltry amount.
A report into the state of peoples pension funds from the financial services firm LV warns that workers are being stretched from all angles, forcing them to make drastic changes to their retirement plans. With so many people relying on the state pension, many workers have no choice but to delay retirement (sometimes indefinitely) altogether or to release money tied up in their home. Options include using an equity release scheme to free up capital invested in their house, which is re-paid at their death, or to down-size to a smaller property.
In the study, just one in seven said they be would retiring when they originally planned to do so, while one in three said they expected to delay their retirement for financial reasons. A further 20 per cent said they were trying to improve their finances to avoid delaying retirement by starting a second job or taking in a lodger. Even the one in seven who will be retiring when they planned will take a lower income in retirement than they originally thought they would.
Perhaps even more worryingly, one in six (16%) are not thinking about their retirement finances at all.In spite of the uncertainty in the housing market, more than half of over 50s with children would recommend their child invests in property to fund their retirement.
So, what now for this generation whose home is their pension? British people over 50 are estimated to have more than £750 million equity in their homes. However, not everyone can downsize and if they do, would they be swapping a more comfortable home for one that isnt really up to scratch? It is important to beware that earlier versions of these equity release schemes ended in disaster when interest rates went up and house prices and share prices fell in the early nineties.
Thousands of pensioners who had borrowed against their homes to invest in broker bonds that delivered disappointing results found themselves thrown into negative equity. They had debts greater than the value of the properties to which they were secured. Since then, most major lenders have drawn up a voluntary code of practice for safe home income plans (SHIP.) However, these schemes are by their nature still largely dependent on market forces.
The clear message is that people approaching retirement can no longer rely on their homes to fund their retirements.