Equity release offers a potential safety net for older homeowners
PUBLISHED: 13:24 30 December 2019 | UPDATED: 13:28 30 December 2019
Equity release makes combining holidays with an enhanced pension possible, says financial expert Peter Sharkey.
Those of us sporting a little more than a hint of grey hair like to believe we're sensible people.
We sort our recycling and rubbish before putting it into the appropriate bin. Depending upon prevailing circumstances, such as the celebration of significant sporting success, a birthday, or some other legitimate excuse, we usually know when we've had enough to drink. We almost always remain calm when some idiot swerves recklessly across the road without indicating, causing us to brake suddenly. And, when it comes to pensions, we do everything by the book. Except we don't.
Millions of people save during their working lives, often when it isn't easy, in order to enjoy the fruits of their labour during a happy and prolonged retirement. However, just as they reach the figurative finishing line, clocking off for the final time, they do something completely out of character which can compromise their future.
There are several potential mistakes that are easy to avoid.
For instance, the majority of people reaching retirement age prefer to draw a regular income from their pension pot (hence 'drawdown'), but they do so without shopping around.
It's incredible that we'll spend hours checking out travel arrangements for a long weekend break in Italy which may cost several hundred pounds, but when it comes to our pensions, worth significantly more money than the cost of an hotel in Rome for four nights, we're happy to stick with the company that managed our savings for years.
In other words, financial inertia could mean we're paying more for the privilege of accessing our own money, or missing out on a wider range of drawdown options.
Then there's the folks who have not yet retired who believe it would be a good idea to draw the 25% tax-free allowance everyone aged over 55 is entitled to do. Problem is: they often get greedy and take just a 'little more'. Unfortunately, this 'little more' could potentially push them into a higher rate tax bracket (because they're still earning a salary) and their pension savings get hit with a 40% (or higher) charge.
The message in both instances is: look before you leap. Yet there's one particular action, likely to tempt more people than they would admit, which can be disastrous.
Most retirees will rely upon the pension pot they've spent years building right up until the point at which they shuffle off this mortal coil, especially as the £168.60 state pension could hardly be called a King's ransom. It's important, therefore, to keep an eye on the pension pot, making sure it lasts. That's the sensible thing to do, isn't it?
Of course it is, but try telling that to people who can't wait to get their hands on every penny and proceed to blow the lot.
We tend to spend more money during our earliest retirement years while we're still able to travel the world, hike across the Pennines, or sail up the east coast, although this doesn't explain how previously 'careful' types end up draining their pension pot, often on fripperies, within a few years of retiring.
An increasing number of people use equity release to supplement their state and private pensions, tapping into property wealth it has taken a lifetime to accumulate. Fortunately, more profligate folks can also fill an impending pension void, caused by spending too much too soon, by releasing paper wealth from their homes.
The equity release process is as straight forward as applying for a mortgage, except the funds released are tax-free and beneficiaries may do as they please with the money. If they've emptied their pension pot, they may wish to consider this before heading off on another spending spree.
Equity release isn't for everyone, hence seeking professional advice before taking the next step is heartily recommended.
For more financial advice, check out Peter Sharkey's regular column, The Week In Numbers.