Pension pots have come under increasing pressure over the last 18 months. Fuelled by the pandemic, a total of 383,000 people withdrew from their pensions during Q1 2021, according to the latest HMRC statistics, representing a sizeable £2.6bn.
The longer-term picture is also worrying, with older homeowners facing an £18,000 shortfall in their annual retirement income and generous final salary pensions likely to be non-existent by 2050, according to an Equity Release Council report.
Lifetime mortgages can be part of the solution, providing welcome funds to plug temporary financial pressures, or longer-term shortfalls in income during later life. And with a number of big pension funds entering the equity release market, including Standard Life and Scottish Widows, customers now have more products than ever to choose from.
So how does it work? There are three typical options available to unlock your equity with a lifetime mortgage:
- A drawdown facility: Also known as a reserve facility, this is a pre-agreed amount of money you can withdraw when needed with zero interest paid until the money is withdrawn, making it a good option if you need flexibility.
- Products that pay a fixed amount of “income”: This is paid each month, over a fixed term. The only downside being that the payments don’t take account of inflation and the term can’t be extended.
- Borrowing a lump sum: With interest rates for lifetime mortgages at their lowest ever, you could use this for a quick cash injection.
Tax advantages
Borrowing against a property rather than withdrawing from a pension can also have its tax advantages. Since borrowing is not regarded as taxable income, you are not at risk from stepping into a higher tax income bracket by using your property wealth. However, if you are claiming means-tested benefits, you should proceed with caution and speak with an adviser about this to check there are no adverse effects.
How it works in practice: a simple scenario
Mrs Zhao is 83 and owns a cottage in Hampshire. It is worth £1,500,000. She has been enjoying a comfortable income from three separate sources; the state pension, a final salary pension from her years in employment, and by drawing down from a self-invested personal pension (SIPP) fund. However, the SIPP fund is almost exhausted, and she is now facing a drop in income of around £32,000 per year.
By raising a lifetime mortgage secured on her home, Knight Frank Finance set up a drawdown facility with a lifetime mortgage provider that will allow her to access small amounts at any time in the future, subject to minimum withdrawals of £2,000.
Mrs Zhao plans to draw up to £10,000 every three months. The facility we have arranged is large enough to cover her income shortfall for at least the next 15 years, even with inflation taken into account. Mrs Zhao now has peace of mind about the future.
If you’d like to find out more about lifetime mortgages or other mortgage solutions specifically tailored to the needs of those over 55, speak to one of our expert brokers at Knight Frank Finance to discuss your options.