People are finding more and more unconventional ways to fund their retirement. One of the more obvious answers that many are turning to is quite literally all around you – your home.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Owning a home is one of the most common goals for many in the younger generations. So much so that they often stretch themselves too thin in order to afford the mortgages for the homes they’ve purchased. The result of this constant drive for a bigger and better home is that their retirement fund falls by the wayside. The government has forced a supposed resolution to this issue by introducing automatic enrolment into pensions, but relying on this alone is not enough.
Mind the gap
We’ve previously discussed how much money you’ll need to retire and how much you’ll need to fill the gap left by the state pension.
According to Brewin Dolphin, the average yearly pension income many working adults hope for is about £40,000 – a figure suited to help them live a luxurious lifestyle in their retirement.
The way many are saving, the maths just don’t add up as in order to achieve this, you’ll need to save over half a million pounds!
It’s true that pension pots have grown over the past few years, but typically you can expect to accumulate just over £186,00, leaving you with a massive £385,000 (at least) to make up. This is where your home comes in.
House prices have skyrocketed over the last few decades and rather than going the route of using your home’s equity and pursuing equity release via a lifetime mortgage or home reversion, you can simply downsize and cash in on the equity that way.
Diverse portfolio
Of course, a robust retirement plan won’t only rely on one avenue to provide income. It will include several elements such as your pension, savings, and other investments and assets – which includes your home. It might be difficult to think of selling the family home you’ve lived in for years and letting go of those cherished memories, but think of retirement as a way to create new memories with your loved ones. And having enough money to fund the kind of lifestyle you’ve dreamed about, which includes spending as much time as possible with your family, is the first step in that plan.
An average four-bedroom home in the UK costs around half a million pounds. That’s an incredibly valuable asset, that unlike stocks or other “liquid” assets, is essentially frozen until the funds are released when you sell the home.
If you choose to downsize to a two-bedroom home, for instance, you could be looking at freeing up over half of what your previous home cost – tax-free. If you reinvest your profit, after about five years (assuming annual returns of 4%), you could end up with £350,000 which makes a sizeable dent in the gap you need to fund your retirement. And if your children have already flown the nest and you can downsize even five years earlier, not only could you be sitting pretty on £425,000 to put toward your retirement, but you’ll also be able to reduce your inheritance tax liabilities.
Not for everyone
Most experts would only urge to pursue downsizing as a part of your retirement plan after you’ve considered all other options. This is because this course of action isn’t recommended and is certainly not always needed, for everyone. Moving could incur expenses, including legal costs, stamp duty, and removal services. You’ll also need to consider the annual maximum of £40,000 you can pay into a pension (even less for those earning more than £150,000 a year.)
Get professional advice on your retirement plans
Dental & Medical Financial Services have been helping doctors and dentists prepare for their retirement for years so we can advise on what you will need financially in order to fulfil your desired lifestyle and recommend ways to achieve your retirement goals.
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