Quarter of retirees financially struggling despite paying off mortgage

Urgent need for effective financial strategies and support systems to ensure a dignified and secure retirement

According to a new study[1], around 21% of retirees say that, after paying off their mortgage, they are “unable to live fulfilling lives” due to insufficient retirement funds. This situation underscores the financial challenges many retirees face, even after achieving what many consider the major milestone of homeownership.

Over a fifth—22%—of retirees surveyed were already reducing or stopping medication spending. Additionally, 15% were skipping meals due to their financial situation, according to data from Senior Capital, which surveyed around 2,070 respondents.

Financial insecurity among British retirees

The figures also showed that 11% of British retirees have no savings at all. Almost one in five retirees across the UK will be on the poverty line as they do not have sufficient money in their pension pots, reflecting a concerning trend of financial insecurity among the older population.
One in seven retirees said that worrying about funding their retirement was the largest strain on their mental health. This highlights the urgent need for effective financial strategies and support systems to ensure a dignified and secure retirement.

Unlocking the value of property

Equity release is an alternative way to help some pensioners access capital to fund their retirement if appropriate. Equity release allows homeowners to unlock the value of their property without selling their home or taking on additional monthly repayments.

Equity release allows homeowners to access the equity built up in their property, providing a tax-free lump sum to supplement regular income whilst still retaining ownership and the right to live in their home for life or until they move into long-term care. This can be particularly advantageous for retired or with limited income, offering financial flexibility and stability without the burden of servicing higher mortgage repayments.

There are two equity release options

The two main types of equity release

are the lifetime mortgage and home reversion. Each offers unique benefits tailored to different needs.

Lifetime Mortgage

With a lifetime mortgage, you take out a mortgage secured against your property, provided it’s your main residence while retaining ownership. This product allows you to continue living in your home as usual. One notable feature is the ability to ring-fence some of the property’s value as an inheritance for your family. This ensures that a portion of the home’s value is preserved for your loved ones.

You can decide whether to make regular repayments or allow the interest to roll up. The loan amount, along with any accumulated interest, is repaid through the sale of the property when the last borrower either dies or moves into long-term care. This option provides a way to access funds without selling your home immediately.

A lifetime mortgage can significantly enhance financial stability during retirement by providing a tax-free lump sum or regular payments. This can be especially advantageous for individuals with limited income or savings, offering additional funds without the necessity of monthly repayments. The flexibility of choosing between making repayments or letting the interest accumulate can be tailored to individual financial circumstances.
Moreover, modern equity release products now come with increased flexibility and protections, ensuring retirees can select the best option for their needs. These features make lifetime mortgages a viable solution for many looking to supplement their retirement income while remaining in their homes.

Home Reversion Scheme

Home reversion involves selling part or all of your home to a home reversion provider in return for a lump sum or regular payments. You retain the right to live in the property until your death, but you must agree to maintain and insure it. This option also allows you to ring-fence a percentage of your home for later use, which could be earmarked for inheritance purposes.

The percentage of the property retained remains constant, irrespective of fluctuations in property values, unless further cash releases are taken. Upon the last borrower’s death or move into long-term care, the property is sold, and the proceeds are divided according to the ownership proportions agreed upon at the outset.

Home reversion plans allow you to remain in your familiar surroundings while accessing a portion of your home’s value. This can offer financial security without affecting your current living arrangements. However, it is essential to maintain and insure the property as per the agreement with the home reversion provider.

When the time comes to sell the property, the sale proceeds are shared based on the predetermined ownership percentages. This structure ensures that you benefit from your home’s value while still planning for future needs or inheritance.

Investigate a multitude of options

However, it’s vital to investigate a multitude of options that could help ease financial obligations, as remortgaging may not always be the right option. The right equity release mortgage product, particularly those that offer the greatest flexibility through limited prepayment penalties, may be an appropriate option versus a more traditional mortgage when you want to unlock the value in your home.

A recent Equity Release Council (ERC) study found that a fifth of people do not expect to retire mortgage-free. This further illustrates future retirees’ financial challenges and the potential benefits of innovative financial products like equity release.

Source data:
[1] Senior Capital surveyed 2,070 respondents - 05.06.24

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.