Could property wealth replace your pension?
Research shows a 65-year-old affluent woman in good health has a 1 in 10 chance of living to 100. While not everyone will live this long, it’s possible life expectancy among the healthier and wealthier may continue to rise. As a consequence, you could be looking for a different way to maximise your income in retirement while keeping an eye on the inheritance you might leave behind.
Most people’s retirement income will be provided by their pension. Some people may look to secure guaranteed income by purchasing an annuity while others may prefer the flexibility of pension drawdown. However, there is an alternative asset that could be considered to provide income in retirement: equity in the home.
The housing market
Figures from Legal & General which surveyed 4,000 adults planning for retirement also found that a third of all people who aren’t currently retired own a property but have less than £10,000 saved in their pension pot. A further 22% of people have no pension savings at all.
According to the Halifax, the housing market had a bumper year in 2021, with the average property price rising a whopping 9.8% over just 12 months. The average value of a British home in December 2021 was £276,091.
You may not be surprised then that one in five homeowners considering how they’ll pay for their retirement plan to use their home as a cash machine, drawing out some of the capital to fund their golden years. One in ten hopes to downsize their property, 9% plan to sell their property and 6% say they’ll access equity by taking a lifetime mortgage.
Is housing equity the solution?
While equity release was historically viewed as a ‘last resort’, new consumer safeguards such as the ‘no negative equity guarantee’ mean you will never owe more than your home is worth. Falling interest rates have led to competitive product pricing; with many now below 4%.
Lifetime Mortgages
A lifetime mortgage is a loan secured against the home. As a form of equity release, it allows you to unlock some of the wealth tied up in your property. The loan is usually repaid upon death or when the last surviving borrower moves out of the home into long term care.
A lifetime mortgage can be used many ways. You could consider using the equity in your homes as a safety net to top up your income. An alternative solution is using equity release earlier in retirement to replace pension drawdown.
While there may be cheaper ways to borrow, let’s consider why you may take income from a lifetime mortgage instead of a pension drawdown:
A lifetime mortgage reduces the equity in the home, and therefore the value of your estate. If your estate is greater than the nil rate bands (NRBs) available, this will reduce the Inheritance Tax (IHT) payable on death.
Using equity in the home to provide an income can avoid ‘sequencing risk’. This is the impact of taking pension drawdown in falling investment markets. While the value of a pension in drawdown could fluctuate, property values could also fall and reduce any remaining equity. Before considering a lifetime mortgage for income over pension drawdown, there are other factors to account for:
Cost Price Index (CPI), house price inflation and the lifetime mortgage interest rate. These three factors could interreact to make a lifetime mortgage the more expensive option
— highlighting the importance of considering a lifetime mortgage on an individual basis.
- Taking income from a lifetime mortgage instead of a pension could be advantageous, depending on how long you survive. Your longevity is therefore important to consider.
- On death before age 75, no income tax is payable on pension savings, and in most cases the benefits will fall outside your estate for IHT purposes.
- On death at or after age 75, whilst the value of the pension will in most cases still fall outside your estate for IHT purposes, the amount payable is taxed at the marginal rate of the person receiving the benefit. At current tax rates this could be up to 40% or even 45%, depending on the recipient’s overall tax position. You might be able to stay in drawdown and take income when you need it. This could reduce the tax rate applied to the payment, depending on their total income for the tax year in which the monies are withdrawn.
- The income from a lifetime mortgage is currently not taxable, so requires a smaller withdrawal than taking benefits from a pension. A basic rate taxpayer taking £10,000 from a lifetime mortgage would have to draw £12,500 gross from their pension to obtain the same figure. For a higher rate taxpayer the amount needing to be withdrawn increases to £16,667. Whilst this approach would keep the pension in a tax-favourable environment, it’s important to consider that compound interest will be added to the lifetime mortgage loan each month. The interest charged on a lifetime mortgage could be a more expensive option in the long term.
Assessing the suitability of lifetime mortgage is complex with lots of factors needing to be taken into account. Every situation is different and it is important to get advised tailored to your specific circumstances.
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Nil Rate Inheritance Tax Bands
The Nil rate Band (NRB) of £325,000 alongside the Residence Nil Rate Band (RNRB) of £175,000 (both CPI-linked from 2026), can be set against your estate providing certain conditions are met. This reduces the amount of estate assessed against Inheritance Tax (IHT). Other IHT exemptions may also apply, such as leaving all or a portion of the estate to a spouse or registered civil partner where applicable.
For estates worth over £2m, the amount of RNRB available is tapered (for every £2 over the £2m threshold the amount of available RNRB will be reduced by £1). Like the NRB, any unused RNRB can be transferred to the surviving spouse or Registered Civil Partner, and set against the estate following their death.
Over time, a lifetime mortgage will reduce the value of the equity in the property. This could reduce the amount of the estate liable to Inheritance Tax, and in some instances, the total amount of Inheritance Tax payable. However, before you take out a lifetime mortgage you should first consider whether any equity in the property is likely to fully utilise the available NRB and RNRBs. Of course, the future value of property upon your death remains impossible to predict with certainty, but should be taken into account.
What does this all mean?
For some people, it could be tax efficient to draw an income using a lifetime mortgage instead of their pension. However,
it may not always be the best approach. For example, if the IHT (Inheritance Tax) exemptions are eroded by the loan, the lifetime mortgage option is unlikely to make sense. This will also be the case if you could exceed your available lifetime allowance at age 75 and incur an excess charge.
Alternatively, leveraging the equity in their home with a lifetime mortgage could offer you a way to boost your income in retirement. In both scenarios, it’s important to look at the total cost of a lifetime mortgage after taking compound interest into consideration.
With varying factors at play, a lifetime mortgage won’t be right for everyone. But for many retirees, bricks and mortar could play an important role in financing retirement. Whether the money is used to strengthen personal finances or to leave a pension intact for loved ones – releasing equity with a lifetime mortgage provides you with greater choice in retirement.
Before you decide
It is important for the option of equity release to assessed on an individual basis to look at all the pros and cons that may affect you and to look if there are other more suitable options. Equity release won’t be right for everyone but for some people unlocking the money tied up in their property can make a real difference to their life.
Deciding to take out a lifetime mortgage is a big decision. It’s a good idea to speak to your family about your plans, it may affect them too, especially if it will impact their inheritance.
It is important to get good financial advice. We are qualified advisers for equity release and can help you understand which product is most suitable for your needs.
Is a Lifetime Mortgage right for you?
To be eligible to release equity from your home with a lifetime mortgage.
- You must be aged 55 or over
- You must own (or be buying) your own home
- Your home must be worth £70,000 or more
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Our promise to you
We want to make sure you are comfortable and confident when making your decision. So we make these promises to you:-
- Provide no-obligation consultation to discuss your needs, priorities & preferences
- Work at your pace - you'll never be pushed or under any obligation to proceed.
- You will have one dedicated adviser who will work with you throughout your journey
- We will lay out plans clearly and talk to you about alternative options
- We will be honest and upfront about our fees.
- All our recommendations are pre-verified by our compliance team to ensure we are giving you good advice and the best possible outcome.
- We only charge a fee if you proceed with our recommendations
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If you need help with your next mortgage get in touch for a free initial consultation.
