Can I use my home as my pension pot?

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The simple answer to that question is yes you can – and there are plenty of homeowners who bear witness to the fact.

The experiences are shared by householders who have sold their homes and moved into rented accommodation as ways of funding retirement were published in a story by the Telegraph newspaper on the 18^th of July 2017.

Although a more recent report by retirement specialists Advantage found that fewer people in the UK are considering using their property for an income in retirement.

So where do you then live?

If you use your home as a pension pot by taking the drastic step of selling it, you still need to live somewhere, of course.

Renting

If you have sold your house to fund your retirement, an option is to arrange private rented sector accommodation. Those who have done so point to the advantages of freedom from ever-increasing home maintenance costs, an alternative to the hassle of selling and buying to downsize, and the possibility of using the move to live closer to live closer to other family members.

The downside, of course, is that you are then tied into the need to pay rent for the remainder of your life, with little or no security of tenure and little control over future increases in the rent charged.

By selling your home, you also stand to lose the additional nil-rate Inheritance Tax band (which stands at £100,000 in the tax year ending 2018 but increases to £175,000 at the beginning of the 2020 tax year) which increases the existing nil-rate Inheritance Tax allowance of £325,000.

Despite the loss of Inheritance Tax benefits and such apparent insecurity, the number of pensioners renting from private sector landlords is expected to double over the next 15 years to a total of nine million people, according to a report by the BBC on the 3^rd of December 2017.

Those who have owned their own home may at least use its sale as ways to fund retirement and, depending on the value of the property sold, make provision for an ongoing income through their later years.

If you have no home to sell and have no access to either an occupational or private pension scheme, you may have to make do with an annual income of less than £6,500 from the current value of a single person’s State Pension. This is unlikely to be sufficient on which to live and to pay rent, with the result that you are almost certain to need Housing Benefits or Universal Credit.

Downsizing

An alternative way of using your home as a pension pot is to downsize. By selling the home which you and your family might have outgrown as you near retirement, you might buy a smaller, less expensive house, and use the difference in values to supplement the cash lump sum or income from your pension.

According to the Retirement Confidence Index (RCI) compiled by property developers McCarthy and Stone, which was published on the 20^th of October 2017, there is likely to be a surge in the popularity of downsizing as more than an estimated 11 million pensioners consider such a move over the next 20 years.

Downsizing not only gives individual homeowners an opportunity to unlock some of their capital from a house that has become too large to live in and maintain, but it may also help to alleviate the current chronic shortage of housing generally by increasing the supply for the older generation, claim McCarthy and Stone.

In a commentary dated the 9^th of February 2018, however, the Centre for Ageing Better, argued that downsizing may not be an option for every elderly homeowner and may, in many instances, miss the point. Rather than the size of the home, its suitability and adaptability for occupation by the increasingly frail might be the more relevant goal.

Furthermore, the upheaval of selling one home to buy another – especially in the current uncertain housing market – may prove a bridge too far for many people preparing to enjoy their retirement.

Equity release

But there remains a further option for unlocking the capital tied up in your home – whilst continuing to live there.

This option offers ways to fund retirement, avoids the potentially crippling rents of the private sector, and still allows you to occupy the home that you have grown to love and be entirely settled in for most of your life. Yet these methods still release capital that may help supplement your pension and, if necessary, fund any modifications or alterations to the home as you grow older and less steady on your feet.

They are, of course, equity release schemes – which unlock some or all of the capital value of the equity in your home, while continuing to live there completely as normal.

Of the two types of equity release – home reversion (which effectively involves selling part of your home to the equity release provider) and a lifetime mortgage (a special form of remortgage) – lifetime mortgages tend to be the more popular and most widely used.

A lifetime mortgage is just that – a mortgage on the property which releases a cash lump sum for you to spend just as you choose. It might be the provision of an income in retirement, for example, or alterations or improvements to your home, a long-promised treat, or a legacy to pass on to your children ahead of your death.

The crucial difference in the lifetime mortgage used for equity release, however, is that there is typically no interest to pay on the loan. Instead, the interest, along with repayment of the capital, is rolled over year upon year until it is eventually repaid when you die or need to move into long-term residential care.

Equity release schemes are regulated by the Financial Conduct Authority (FCA), which sets the standards for the protection of consumers’ interests, including the critical condition that such schemes include “no negative equity” conditions. These provide a guarantee that the terminal repayment value of the lifetime mortgage, and its accumulated interest, never exceeds the actual market value of the property at the time of your death or when you move into long-term residential care. This ensures that the market value of your home is always sufficient to cover repayment of the lifetime mortgage granted by the equity release provider.

Summary

So whether you decide to stay put and release cash from your home or sell up and move into rented accommodation or downsize to a smaller home, you will still need to invest your cash so that it works hard for you in retirement and so you may wish to consider taking advice

 

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