Retirement Money News

Deciding how to secure an income from your pension pot will be a key part of retirement planning, yet unfortunately, it seems that not everyone is giving it the attention it deserves. Indeed, research from Zurich suggests many retirees are entering drawdown with no planning whatsoever, and instead are relying on luck and guesswork when it comes to deciding how much to withdraw each year.

Lack of forward planning

The research found that just a third (34%) of retirees in drawdown calculated how much income they'd need to generate from their pension pot before they retired – the same proportion worked out how much they'd need to cover living expenses and how long they'd need their money to last, while just 22% calculated how much they'd need to fund leisure activities – which means the majority aren't even taking basic steps to work out how much they can afford to take from their pot.

This means a worrying proportion of retirees are at risk of draining their pension savings too early, a concern compounded by the fact that very few think about where they'll continue to invest their drawdown funds during retirement. Just 16% decided where they'd invest their funds to achieve their desired income, for example, and only 17% thought about the strategy they'd use to withdraw that income, such as selling shares or living off the dividends.

Future-proof your finances

It appears that many retirees are leaving the fate of their financial future to guesswork, and Zurich is instead urging people to make sure they have a suitable plan in place well before they move into drawdown. This includes researching drawdown providers, thinking about how much you'll be spending in retirement and how long you'll need your funds to last, calculating how much income you can afford to withdraw each year and considering the kind of funds you'll invest in, and of course, seeking suitable advice is key.

"Many retirees in drawdown are relying on blind luck to make their savings last throughout retirement," said Alistair Wilson, Zurich's head of Retail Platform Strategy. "But by taking simple steps to work out how much they can afford to take from their pot, savers can avoid withdrawing too much, too soon. Setting a sustainable level of drawdown income in drawdown can be something best done by speaking with a financial adviser, or getting free guidance from Pension Wise."

What can you do?

As Alistair Wilson noted, taking the time to work out how much you can take from your pot – bearing in mind things like day-to-day living expenses, life expectancy, investment strategy and additional expenditure – is key. This could of course be tricky to achieve on your own, so make sure to seek advice to ensure you stand the best possible chance of securing the income you need throughout your retirement.

What next?

Find out more about income drawdown and retirement planning in general by reading our guides.

If you're approaching retirement and still have an interest-only mortgage you're not sure how you'll pay off, you now have another option to consider – taking out a retirement interest-only mortgage. A possible alternative to equity release and a way to clear your current mortgage debt without needing to downsize, a retirement interest-only (RIO) mortgage works in a similar way to traditional interest-only deals, so is now the time to consider one?

Clear your interest-only mortgage

Last year, the Financial Conduct Authority estimated that there were some 1.67 million full interest-only and part-repayment mortgages outstanding in the UK, and many of those – an estimated 81,400, according to previous predictions from the regulator – are due to mature this year. This may not be a problem for those who know how they're going to repay the capital, but those without such a plan may be in for a worrying few months.

Previously, the options for such borrowers were fairly limited; many will be over the age of 60, and remortgaging in retirement used to be all but impossible given strict affordability rules, which meant many were faced with the prospect of losing their homes. Now however, the rules have been relaxed, and RIO mortgages are becoming increasingly common.

Could such a mortgage be for you?

RIO mortgages allow homeowners to remortgage their existing loan under similar terms to their current arrangement, meaning they only need to repay the interest for the term of the loan – which can be a lot more achievable for those on a pension income. Then, when the borrower dies or goes into care, the property will be sold and the mortgage repaid.

However, even within this area, providers are becoming increasingly flexible. In the months since such loans have been widely available – it was only in April last year that the regulator relaxed the rules and separated RIO mortgages from equity release, and widened the appeal of such loans in the process – numerous providers have got in on the action and are offering a wide range of options, with some allowing borrowers to repay part of the capital as well (thereby leaving more of an inheritance to loved ones) and others offering set repayment dates.

Many big-name lenders now offer these mortgages, giving peace of mind to those who would prefer to borrow from a high street bank or building society. This includes Post Office Money and Leeds Building Society, while Nationwide began trialling such products in November, and there are plenty available from smaller mutuals as well (such as Marsden, Vernon, Bath, Mansfield, Family and Scottish Building Societies).

Ultimately, RIO mortgages could be a great option for those unsure how they're going to repay their interest-only mortgage debt, but as with any financial decision, getting the right advice is essential. You can speak to our adviser partners at Premier Financial Group to get started, and see if you should consider this later life borrowing solution.

Over half (52%) of people aged 40-60 are worried about affording retirement, according to research from Nationwide Building Society, with 43% not believing that they will be able to afford the retirement lifestyle they want.

In addition to this, the research revealed that future pensioners risk a shortfall of more than £68,000 over the course of their retirement, with 33% of those in middle age expecting to survive solely on their state pension once they finish work.

Expectations vs. reality

Many are aware that they may be out of pocket when they reach retirement, with those in middle age expecting their monthly shortfall to reach an average of £208 in their post-work years. This equates to a lifetime deficit of £37,440, when taking into consideration the current retirement age and average life expectancy.

The reality, however, could be even bleaker, with monthly shortfalls projected to be around twice as high: those polled who are aged 60+ and already in retirement said they receive £505 a month in state pension on average, but require £885 a month to live on. For those without any additional pension provision to cover the extra expenditure, this could leave them with a shortfall of £380 a month, or £4,560 a year – which over the course of a 15-year retirement could add up to a potential shortfall of £68,400. It is important to note that these figures are based on the current income gained from the old state pension, however the new flat rate State Pension is £164 per week, which is £656 a month. While the new flat rate State Pension may reduce the shortfall slightly it is clear that those in middle age will likely not have enough income to sustain their lifestyle once they retire.

Plug the gap

However, all may not be lost, as people in retirement have often accumulated a number of assets over the course of their lifetime that they can use to increase their retirement income, their home being one of them. Last month Moneyfacts.co.uk reported on the growth of equity release products over the last five years due to increasing demand from consumers looking to release cash from their homes, with the figures showing that today there are 200 lifetime equity release deals on the market compared to the 40 products available in 2014.

Despite this growth, equity release is still an option many are cautious about. The research by Nationwide found that those in middle age have an average of £125,350 equity currently in their home, yet many would try and find other ways to survive before tapping into their property wealth. Indeed, 32% see accessing equity in their property as a last resort, while 28% don't want to leave any debt to their family, and 24% wouldn't know who to approach if they needed advice on their retirement.

Rachel Springall, finance expert at Moneyfacts.co.uk, said: "It is worth keeping in mind that equity release is not solely aimed at the 'equity rich but cash-poor' or for those looking to plug the gap of their later life care costs. These mortgages could be an option for those hoping to soften any inheritance tax blow, while lifetime mortgages may also be an alternative to borrowers who have considered downsizing, but who do not want to move and pay stamp duty."

Jason Hurwood, Nationwide's director of home propositions, added: "We are living longer and need more money to keep us going. The reality is that without adequate income, and potentially living a third of our lives in retirement, older people risk missing out at a time in life when they want to relax and enjoy themselves…Recalibrating the relationship between our money, our expectations and our assets is key to unlocking a retirement that is comfortable."

What next?

If you are considering equity release, you can compare some of the options available on the Moneyfacts.co.uk equity release page or call Moneyfacts' trusted broker MCB Financial Services Ltd on 0800 193 0036.

2018 proved to be another record year for the equity release sector, with latest figures revealing that retired homeowners released £3.6bn in property wealth over the year, the highest annual total ever seen – and by all accounts, 2019 could go even better!

Record lending

The figures, from equity release adviser Key, reveal that the market has doubled in size in just three years, rising from £1.71bn of lending in 2015 to 2018's £3.6bn, which also marks a rise of £586m from 2017 (when the total stood at £3.01bn). And this isn't even the full story – when further advances and additional drawdowns are factored into the equation, the annual figure for last year is closer to £4bn.

Breaking it down further shows that homes paid out almost £10m every single day in 2018, with customers releasing an average of £76,500 each. Overall, the number of plan sales rose by 21% year-on-year – with drawdown plans continuing to account for the majority of sales (64%), while lifetime mortgages accounted for 36% of all plans – and the value of funds released rose by 19%, giving retired homeowners plenty of scope to improve their standard of living. But what did they spend the money on?

The rise of gifting

Gifting some of the money to friends and family is proving to be a growing use of released funds. Indeed, the number of customers gifting money rose from 24% to 27% over the year, with the money typically being used to clear debts, pay for life events such as house deposits, university fees or weddings, or even to pay for things like cars and family holidays.

However, the most popular use continues to be funding home or garden improvements, with over two-thirds (64%) re-investing some or all of the money into their houses. Another 33% paid for holidays, while others focused on clearing debt, with 31% using some or all the cash to clear credit cards or loans and 22% paying off existing mortgages.

"The equity release market recorded another strong year of growth [and] has doubled in size in three years, demonstrating how important it is to retirement planning," said
Will Hale, CEO at Key. "The growth in gifting highlights the intergenerational benefits of equity release for families … Even the use of equity release to fund home and garden improvements has benefits as it helps people to 'age-proof' their home and preserve wealth for the family.

"Debt remains however a major issue for some retired people and substantial numbers are relying on equity release to clear credit cards and loans as well as paying off mortgages. Good specialist advice is key to ensuring that older homeowners receive the most benefit from their property wealth and use it in the most appropriate way for them and their families."