Could your home be the key to surviving the cost of living crisis?
Equity release is one option retirees looking to boost their retirement incomes might consider
Rising prices of essentials such as food and energy have added almost 20% to the minimum cost of retirement according to new research, leaving many retirees worried about how they’ll make ends meet.
The Pensions and Lifetime Savings Association (PLSA) said that the cost to sustain a minimum lifestyle in retirement, which covers basic needs, has increased from £10,900 to £12,800 – or 18% – for a single person, and from £16,700 to £19,900 – or 19% – for a couple. This includes £96 for a couple’s weekly food shop, a week’s holiday in the UK, eating out about once a month and some affordable leisure activities about twice a week. It does not include budget to run a car.
To achieve a comfortable Retirement Living Standard, which would provide more luxuries such as regular beauty treatments, theatre trips and three weeks holiday in Europe a year, and a £238 weekly spend on food shopping, one person would need an annual income of £37,300 for one person, rising to to £54,500 for a two-person household.
Calculations by Quilter reveal that for a single person to achieve a comfortable lifestyle in retirement they would need a pension pot of £645,000, an amount that for most people will be pie in the sky.
Someone looking to achieve what the PLSA defines as a moderate retirement lifestyle, would need to build up a pension pot of approximately £301,000. A moderate lifestyle includes being able to afford £74 a week on food (including food away from the home) as well as two weeks in Europe and a long weekend in the UK every year.
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Jim Boyd, chief executive of the Equity Release Council, the trade body for the Equity Release Council, said: “This analysis throws into sharp relief the pressure price rises have put on the purse strings of retirees, at a time when they want to be enjoying all that later life can offer. With retirement incomes needing to stretch further, it is vital that people take a rounded view of later life finances and include property in the mix of income sources that can help achieve the lifestyle they want.”
Equity release is one option retirees looking to boost their retirement incomes might consider, although it is not without its drawbacks, so it’s essential to seek professional financial advice to work out if it’s right for you.
As its name suggests, equity release involves unlocking some of your property weath without having to sell up and move home. However, equity release rates, along with standard mortgage rates, have risen in recent months following a series of increases in the Bank of England base rate, bumping up costs for borrowers.
Although you don’t have to make any repayments when you release equity, as the loan and interest charged on it only needs to be paid back when you pass away or move into long-term care, interest is compounded, so the amount you owe can grow very quickly.
Compound interest works by charging interest on the total amount of the loan, including the interest that has already built up. If you’re thinking about equity release, you must therefore remember that it will reduce any inheritance you’d planned to leave, and also could affect your entitlement to means-tested benefits.
Mr Boyd said: “With £5.4 trillion of equity in the housing market, for many residential property is the largest financial asset, and can help to bridge the gap between people’s savings and the financial challenges that come in later life when incomes typically fall. It’s important we don’t leave the UK’s ageing population to face difficult retirement decisions without a full awareness of their options.”