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Equity release market is on the rise

Peter Sargent

Sub Editor / Proof Reader
Published: 27/01/2022

The equity release market saw a return to growth in 2021. Record amounts of property wealth were accessed by customers, according to industry body the Equity Release Council, which says the market rose by 24.8% last year, to a total of £4.8 billion.

Annual lending to customers aged over 55 broke the previous record of £3.94 billion, which was set in 2018, as the fourth quarter of 2021 turned out to be the “busiest on record”. Between October and December, customers borrowed £1.3 billion. Average loan sizes increased as more than 76,000 new and returning customers took out products. These included lifetime mortgages and home reversion plans.

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Good news for retirees as annuity income reverses three-year decline

Pensioners may be pleased to see average annuity income increased for 2021, marking a reversal after three years of falls.

According to the latest analysis by Moneyfacts.co.uk, average annual annuity income was 3.9% last year, compared to -6.3% in 2020 and -8.5% in 2019.

The analysis also found that pension fund growth almost doubled between 2020 and 2021, from 4.9% to 9.5%. This is still lower than the 14.4% average growth seen in 2019, but will be welcome news for retirees as the cost of living rises.

Official data from HMRC shows that pensioners are taking advantage of the pension freedoms introduced in 2015, withdrawing £2.6 billion from their pension pots during the first quarter of 2021. Pensioners have taken a total of around £45 billion in flexible withdrawals since pension rules were relaxed.

Pre-2015, people were required to buy an annuity despite the poor rates on offer, so the market shrunk rapidly after the government introduced pension freedoms and consumers could turn their backs on these poor value products. Since then, however, some pensioners have found there is a place for annuities in their retirement planning strategy.

With the ability to make flexible withdrawals from pensions since the rules changed, people may have been taking money out of their pensions to give to family as an early inheritance, as well as to fund a retirement gap, suggested Rachel Springall, finance expert at Moneyfacts.co.uk. Aside from dipping into their pension pots, homeowners could consider equity release to free up some funds, although this requires careful consideration, discussion with family, and professional financial advice.

Regardless of their financial situation, pensioners will be pleased to see some positive growth in annuity income and pension funds to smooth their path in retirement.

“Retirees concerned about their retirement pot may breathe a sigh of relief to see both the average pension fund and annuity growth was positive in 2021,” said Springall. “The volatility of pension funds in 2020 was evident, with a fall from a positive return of 14.4% in 2019 down to 4.9%. Consumers will now see 2021 returned a positive 9.5% average growth, although this will vary by individual fund.

“This is an encouraging sign that those looking to retire this year may have more in their pension pot to either take out an annuity or opt for drawdown. If they decide to annuitise all or part of their pension they will also find annuity income is up from last year too, providing them with a welcome income boost compared with those who retired in 2020.”

Those planning ahead for retirement but looking at a potential shortfall in funding could consider putting more into their pension now, or opening a Lifetime ISA to benefit from a 25% government bonus on their savings. Whichever option you choose, getting retirement projections sooner rather than later is sensible, Springall advises, to give you the full picture and enough time to save.

Moneyfacts’ calculation for annuity income is based on someone aged 65 buying a single life level without guarantee annuity for a purchase price of £10,000.

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The best lifetime mortgage rates available during December 2021

The equity release sector has remained strong this year with the first nine months of 2021 seeing homeowners take out £2.989 billion via equity release. As well as this, last month, equity release was on track to break through the £4 billion mark this year.

As well as this , lifetime mortgages have been growing in popularity this year, with the Equity Release Council promoting using property wealth to top-up pensions and to provide a living inheritance to children and grandchildren.

To help homeowners decide whether a lifetime mortgage is right for them, below we’ve highlighted some of the most competitive rates available this month.

The plans highlighted below are not endorsed by Moneyfacts.co.uk but have been chosen as they offer competitive rates for the scenario that we have selected. It should be noted that other plans are available that offer similar competitive rates but may offer incentives, such as cashback, that suit the borrower’s needs better – as such borrowers should speak to an equity release broker who will be able to select the best plans for individual requirements.

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Increase in older homeowners using property equity to fund home improvements

The number of homeowners aged over 50 unlocking equity from their property to pay for home renovations almost doubled in the three months leading up to September compared to the previous three months, according to research from Hodge Bank.

The bank found that the number of older homeowners using products that allow them to release equity from their homes to pay for home improvements increased from 12% to 22%.

Although there are several products that allow homeowners to release equity from their properties, including retirement interest-only mortgages (RIOs), one of the most common ways to do this today is via a lifetime mortgage, often referred to as equity release.

According to Simon Gray, managing director at equity release advisory firm HUB Financial Solutions, equity release can be a good way to pay for home adaptions for those in later life who want to remain in their current home.

He said: “It’s very common for our lifetime mortgage clients to release equity to pay for home improvements and adaptations. Just over four in 10 of the customers we advised intended to spend some of the money adapting or improving their homes and the average amount they expected to spend was just under £10,000, although some were six-figures or more.

“Home improvements may mean spending relatively large lump sums now to provide benefits over many years into the future. Those benefits may be bringing the house up to a higher standard, making it more comfortable to live in and more affordable to run. That could be repairs, improvements such as new windows to cut future energy bills, or redecorations. These kinds of changes are seen as investments too as they usually increase the value of the home and cut costs.

“People who intend to keep living in a home right through later life may also at some point need adaptations such as ramps, stairlifts and new bathroom or kitchen fittings.

“Many retired homeowners do not have large cash reserves to pay for this kind of work, so they need help finding options. The flexibility of modern lifetime mortgages makes them more accessible to greater numbers of people. For example, we expect more new borrowers to make use of the interest-serviced feature, opting to pay some of or all the monthly interest on their loans out of income. That gives homeowners access to the lump sums they need at competitive rates while giving control of the speed at which the loan grows in the future.”

Although equity release can be a good choice for those looking to make home improvements later in life, those considering this option should be aware that it can have a long-term impact on finances, particularly on the inheritance the borrower leaves.

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Retirees face income shortfall risk

Retirees looking for the security an annuity provides may be facing lower retirement income than expected as the average annuity rate fell by 2.90% between July and September (Q3).

As well as this, although pension funds have returned a 0.45% on average during Q3, this is still significantly lower than returns gained last year, which stood at 1.77% on average.

Rachel Springall, finance expert at Moneyfacts.co.uk, explains that the pandemic has had a significant impact on retirement savings.

She said: “A third (36%) of pension funds fell during Q3 2021, which is why consumers would be wise to keep a close eye on where they have their money invested. Those who saved £100 gross per month for 20 years into a personal pension would have built a pot of £53,157 on average, and taking a standard annuity at age 65 would result in a yearly income of £2,200.

“The majority of pension fund sectors are still offering positive returns, but there has been a notable shift compared to Q2 2021, when 91% of pension funds returned growth compared to 64% in Q3 2021. The average pension returned less than 1%, at 0.45% during Q3 2021 compared to 4.1% during Q2 2021. Compared to the equivalent quarter a year ago (Q3), fund returns have worsened slightly in 2021, but it is worth remembering that 2020 overall was hit hard by the impact of the Coronavirus pandemic. The volatility to fund sectors makes it ever-more prudent for consumers to monitor where their cash is invested, but it is also important that they seek advice to ensure they don’t switch their funds in haste.

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Recent News

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The best lifetime mortgage rates available during November 2021

24th November 2021

Money unlocked from property via equity release is set to break the £4 billion this year, with homeowners taking out £2.989 billion via equity release in the first nine months of 2021

Money unlocked from property via equity release is set to break the £4 billion this year, with homeowners taking out £2.989 billion via equity release in the first nine months of 2021

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Equity release rates rise as £4 billion in property wealth set to be released this year

11th November 2021

In the first nine months of 2021 homeowners have taken out £2.989 billion via equity release, but new data shows that equity release rates are rising

In the first nine months of 2021 homeowners have taken out £2.989 billion via equity release, but new data shows that equity release rates are rising

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Government announces new laws to help protect pensions from scammers

8th November 2021

The Government has unveiled new laws designed to help retirement savers protect their pensions from scammers

The Government has unveiled new laws designed to help retirement savers protect their pensions from scammers

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Would you save money switching equity release?

21st October 2021

Falling equity release rates mean that some homeowners could save money by switching to a new deal at lower rate

Falling equity release rates mean that some homeowners could save money by switching to a new deal at lower rate

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Good news for retirees as annuity income reverses three-year decline

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Pensioners may be pleased to see average annuity income increased for 2021, marking a reversal after three years of falls.

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Increase in older homeowners using property equity to fund home improvements

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The number of homeowners aged over 50 unlocking equity from their property to pay for home renovations almost doubled in the three months leading up to September compared to the previous three months

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Government announces new laws to help protect pensions from scammers

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