Lifetime Mortgages can help plug the gap in retirement income while your pension fund recovers

The Association of British Insurers (ABI) have raised concerns over people accessing too much of their pension pots, or taking funds out too early, to make up for financial losses experienced during the coronavirus lockdown, according to an article from Sky News.

And the long term picture is concerning too, with older homeowners facing an £18,000 shortfall in their annual retirement income, according to a report published by the Equity Release Council last month.

Pension pressures are set to rise as many people access their savings early, while generous final salary pensions are expected to be extinct for most people by 2050. Meanwhile, pension income growth has stalled, increasing by just £7 a week over the last decade, the report said.

Lifetime mortgages can be part of the solution to these challenges. Older homeowners looking to stay in their current home, but who want to unlock the wealth they have built up in it, have two options under a lifetime mortgage:

1. Set up what’s known as a “drawdown facility”

Sometimes this is known as a reserve facility, and it works well for many. Most Lifetime Mortgage providers will offer products with a draw down or reserve facility. This is an amount pre-agreed when the lifetime mortgage is first taken out and the borrower can withdraw (draw down) these funds when they want them. This can be on a regular or ad hoc basis, and the advantage to the borrower is they won’t pay any interest until they have withdrawn the money. This sounds ideal if the borrower needs to top up their income, and it gives them control over how much and how often they withdraw. Borrowers must be careful not to withdraw the whole facility too soon though, as they may find it very difficult to access additional funds in the future.

2. Set up an “income” lifetime mortgage

There are products that pay a fixed amount of ‘income’ each month. The borrower selects a fixed amount to be paid to them each month and also a fixed term over which they will receive these payments. The only downside is that the payments don’t take account of inflation and can’t be extended if the borrower finds they need the additional money for longer.

Tax efficiency

It’s important to remember that the amounts you draw down, or the regular payments from your ‘Income’ Lifetime Mortgage are not actually income; they are borrowing. They look and feel like income, but do not need to be included as income on your tax return each year. This means you don’t risk stepping into a higher income tax bracket by using your property wealth. You do need to be careful if you are claiming means-tested benefits though, and we recommend you speak with an adviser about this in order to check there are no adverse effects.

If you would like to know more about using your property to top up your income, visit our Borrowing Into Retirement section, or give us a call.