On this edition of the Mortgages Money and More podcast, Craig is joined by equity release specialist Mark Thompson to talk about how equity release can help in the fight against inflation.
Rapid growth in Consumer Price Index
The consumer price index is a well-known indicator of inflation. And we’re up from 5.1 in November to 5.4 in December, so the cost of living is going up fast.
Inflation is important to take into account when we’re giving financial advice, because what your money is worth today won’t be the same in ten years time. If it isn’t growing, you’re actually losing wealth. And obviously people’s income isn’t increasing in line with the current rate of inflation.
Inflation and planning for retirement
Recent figures have found that people are preparing for retirement as much as they possibly can, but not realising how expensive it might be in reality.
It’s not unusual for people to think they have quite a good pension pot, but when they speak to a pension adviser, they have an unpleasant surprise about how much they will actually have to live on in the future.
It’s easy to put off, but you should get regular pension advice as soon as you possibly can, no matter what age you are. Don’t get caught out. There’s a big distinction between living a full life in retirement and just existing.
Property as a plan for retirement
The people we talk to often see the value of their property going up and know that by the age of 55, 60 or so, the mortgage will be paid off. Their house will be worth a certain amount. They’re not just looking at their pension pot as a fund – the home is also a source of money for later life. People are more open to using property to fund later life than ever before.
I certainly know that my property has gone up much more in the last year than my pension fund. The markets have been up and down and there’s obviously no guarantee, but it’s likely property growth will continue.
So in that sense, there’s a lot of wealth being built up in property. The less you’re borrowing against the overall value of your property, the cheaper mortgage rates are too.
Using equity release to boost your income
If you look at the equity release products taken out last year, nearly three quarters used a drawdown facility – it was 74%, while 26% took a lump sum.
Usually people take a lump sum for a specific reason: to pay off an interest only mortgage, to help kids buy a home etc.
But those 76% of people taking drawdown are holding funds back for the future. Generally speaking, unless they’ve got a big need, people are using that money as an insurance policy or safety net.
If they haven’t got a lot of savings, what happens if the boiler breaks or the car breaks down? There’s no such thing as a cheap car. If you need a new car, where does that money come from?
The beauty of the drawdown is that you don’t pay interest on the money set aside. If I have £50,000 available as drawdown, it’s costing me nothing until I take it. A lot of people are living hand to mouth, with little in savings. And it’s only when you start talking to them about inflation that they realise that the pension payments that will come through their door will essentially shrink in value.
So having that drawdown facility built in to protect you in the future gives you great peace of mind.
Blending your pension and equity release
There’s a real shift in mindset here. If my pension pot is not giving me the value I expected, there’s another way to make sure I have enough.
If you’re thinking I’ve got £X per year from my pension pot, but I need an extra amount to live more comfortably. Well, you can have that. You could decide to draw down £12,000 every year. You get £1,000 paid from your pension into your current account and then another £1,000 from your property.
Your property is a pension pot too. You’ve been paying into it for the last 25 years, and it’s been growing faster than the rate of inflation.
Balancing your drawdown against growth
I know quite a few people that have been drawing on their pensions for years, and their aim is to draw money out without reducing the overall total in the pot – by living off the growth.
In a way, you could do that with your property too. You could set up a drawdown of a certain amount, and the property value could hopefully grow by the same amount that you have taken from your equity.
You get a state pension, hopefully you’ve got a private pension, and you’ve got a bit of equity release. This should help you enjoy your life. The key is to start thinking about it sooner rather than later.
Plan now – don’t wait
You can never start pension planning too early. It’s a balancing act, as in your younger years you’re saving for a house, then you have more expenses as your family grows. And at some point there will be a trigger in your mind that you need to start paying towards your pension.
It tends to be later in life, which is not ideal. So don’t bury your head in the sand. Sit down with an adviser and fully understand the picture, how much you need for retirement and how you might be able to get it.
Equity release is certainly a solution. But it shouldn’t necessarily be the first solution. We would always look at the alternatives first. Although there are some people in the media that seem to think equity release is a dirty word, why wouldn’t you? Your property is a massive capital asset.
So people do need to review what their options are going to be, and we’re here to help. We talk about all the eventualities, including what happens if you lose a pension because your partner has died.
These are serious conversations and they can take time, because these decisions are important ones. Ultimately, even in the context of rising inflation and living costs, there are solutions to explore that will mean you can live well, and not just survive.