The kid’s have flown the nest, leaving you and your partner, if you have one, rattling around in a property that is too big for your needs as you reach retirement. Downsizing to a smaller, more comfortable property as you reach retirement age is a popular way to finance retirement, allowing you the opportunity to cash in on spiralling property prices and access the equity in your home. While downsizing within the same locality will give you access to additional money during retirement, many retirees choose to downsize to a different area, where property prices are cheaper and they get more value-for-money. For example, a couple selling a three bedroom property in Wimbledon, London, for approximately £450,000, would be able to buy a three bedroom bungalow in Brecon, Mid Wales, for approximately £225,000, allowing, if they have paid off their mortgage, a surplus of £225,000 on which to live off during retirement.
Best for: Those who have paid off their mortgage and seen their property rise considerably in value and who are looking to relocate to a different, cheaper, area to live.
For those who have a strong emotional attachment to their home, or who do not want the stress and strain of moving, but are ‘equity-rich-cash poor,’ equity release schemes are proving a popular option. As many as 23,470 lifetime mortgages worth over £1.015 billion were taken out between July 2005 and July 2006 by pensioners looking to raise extra capital through their homes. Equity release refers to the process of releasing or ’unlocking’ part or all of the excess value on a property – excluding what is still owed on any mortgage. In order to apply for an equity release scheme, candidates need to be in their mid fifties, although some schemes start at sixty, and should own their home with no mortgage or have only a small loan outstanding. SHIP, the UK equity release industry body which represents more than 90% of the Equity Release sector, claims that interest rates for lifetime mortgages are currently more favourable than those for normal mortgages, especially when you consider that interest rates for equity release remains fixed for the life of the loan, unlike mainstream mortgages which can fluctuate in line with the Bank of England’s inflation base rate. However, many schemes charge a far higher level of interest, and anyone considering such a scheme should seek independent financial advice.
Best for: Those who do not want to move from their existing home, but are keen to tap into the increased value of their property.
Perhaps not the most popular choice for anyone contemplating retirement, but at least now, following new anti-ageist legislation on 1st October, if you want to continue to work passed the traditional retirement age of sixty or sixty-five then you can. Also, new legislation, known as A-Day, have made it easier to continue to work, full or part-time, without it eating into your pension rights. Under previous legislation members of occupational pension schemes had to retire from work in order to draw their pension, whether they wanted to work or not. The new legislation allows people to ease their way into retirement, so that you can begin drawing on your pension while continuing to work, or choosing to work part-time. As the population ages, and state pensions continue to dwindle in size, working, even on a temporary or part-time basis, is likely to figure as prominently in the lives of the over-65s as it does with the younger generation.
Best for: Those with less money to live off during retirement than they would like, and for those who enjoy working, albeit on a part-time basis.
Although they have suffered a justified bad press in recent years, with miss-selling scandals and shortfalls in many a scheme knocking consumer confidence and trust in pensions overall, the tax incentives to those who choose to fund their retirement in this way are extremely advantageous. New rules allow schemes the opportunity to be able to pay a tax free lump sum of up to 25% of the fund value and to a maximum of 25% of the lifetime allowance irrespective of the type of pension held, be it a private, occupational or voluntary contribution pension scheme. New rules also mean that if you want, you can even contribute a year’s salary into your pension, so long as it does not exceed the annual allowance limit for each tax year. The annual allowance for the 2006/7 tax year has been set at £215,000, rising by £10,000 each year to £255,000 in the 2010/11 tax year. However, if you make additional contributions above this excess, it will be taxed at 40%. Also, remember that if you hold too much money in your pension scheme, anything over £1.5 million, held over a lifetime, will be liable to 55 per-cent recovery charge tax.
Best for: Regular savers looking to plan ahead for their retirement by saving in a tax-efficient way.
Those who have had their finger’s burnt with pension-schemes-gone-bad, or those who like to keep a firm grip on their finances and be able to access their cash whenever their circumstances might change, rather than hang on until reaching retirement age, may prefer to simply invest their money and hope it generates enough money to fund retirement. A popular alternative to pensions in recent years has been buy-to-let property, which has seen massive returns as property prices increase. Research from the Society of Mortgage Lenders revealed that buy-to-let borrowing set new UK records in the first half of 2006, with lenders advancing 152,500 loans, worth a staggering £17.5 billion. But as the market becomes fiercely competitive, consumer group Which? stresses that the key for anyone thinking about investing in buy-to-let is to think of it in terms of running a business: turnover in the form of rent needs to exceed the costs of buying and maintaining the property. They suggest that as a rough guide, rent from a property should exceed the actual running costs by 25-30 per cent. The idea being that this profit will cover the owner for times when the property is not rented out and cover any large expenses such as a broken boiler, as well as costs such as tax on rental income.
But there are other investment options available to those looking to generate a retirement income, some of which include: investing in the stock market, either through the purchase of individual shares, or through investment trusts or funds, which offer a greater degree of security by spreading where your money is invested; bonds or gilts, which offer a far greater degree of investment security than shares and usually tie your money up for a certain period, typically, 5 – 10 years, and; ISAs, which are tax free wrappers that can be used for saving cash or investing in equities or equity related products and offer many tax breaks, as ISAs are exempt from Capital Gains Tax.
Good for: Those who like to keep control of their finances and are weary of pensions, but are willing to spread their money around and take controlled risks where necessary in order to generate a retirement income.
Retirement planning is one of the most important financial decisions you can make in life and we recommend you seek independent financial advice to help you understand the retirement options open to you.