Retirees are increasingly taking advantage of flexible income options but there is a risk it could harm long-term financial security. Research shows that more people are using Pension Freedoms to access pensions savings flexibly and Equity Release to boost income.
These can both be incredibly useful when building retirement income to suit lifestyle. However, it does come with risks if the pros and cons aren’t carefully considered with personal circumstances in mind.
According to the Equity Release Council, homeowners unlocked £3.95 billion of wealth from properties between July 2018 and June 2019. This is an increase of £450 million (12%) compared to the previous 12 months. Equity Release is usually only available to over 55s. A growing number of products on the market have recently increased awareness and choices for retirees looking to boost their capital.
Equity Release usually involves taking out a loan secured against your home, which isn’t paid back until you die or enter long-term care. As a result, it can seem like a simple solution when seeking increased funds for retirement. However, it isn’t as simple as that. Typically, no interest payments are made with an Equity Release product, instead, they are ‘rolled up’. This means the total amount owed can rise rapidly. Equity Release may also limit your choice if you wish to downsize or more for another reason.
Purchasing an Annuity used to be the most common way to access pension savings, providing a guaranteed income for life. The introduction of Pension Freedoms in 2015 changed this by allowing retirees to take a flexible income from their pension. Between July 2018 and June 2019, £8.7 billion was withdrawn from pensions flexibly, figures from HMRC show. The second quarter of 2019 alone was an all-time high, with £2.75 billion being withdrawn.
Retirees wanting more choice in how they access their pension by allowing withdrawals have welcomed Pension Freedoms. But there is a real risk of taking too much too soon. Whilst average withdrawal figures are decreasing, suggesting the majority of retirees are taking a careful approach, it’s something to keep in mind.
A trend that’s not going away
In the past, retirement followed a fairly linear path for most. However, changing lifestyles means your ideal retirement can be very different from someone else’s. Pension Freedoms and Equity Release are just two options that help you create an income that suits your goals. As more people embrace flexible retirement lifestyles, it’s unlikely that the trend will be going away any time soon.
Alistair McQueen, Head of Savings and Retirement at Aviva, said: “[The] figures show that people are turning to all their assets – property and pensions – to fund their later lives, like never before.
“The next ten years will see nine million people reach the age of 55 – the age at which we are typically eligible for Equity Release and the Pension Freedoms. Nine million is more than we have ever seen before. The desire of the nine million to flexibly blend their assets at retirement – property and pensions – looks set to keep growing.”
Flexibility places responsibly in retirees’ hands
Increased flexibility in accessing pension and property wealth may help set you on the right path for achieving retirement goals. However, the increased choices also place more responsibility in your hands. Pension savings, for example, will usually have to last through several decades of retirement; flexibly withdrawing larger amounts early on could have a negative effect long term.
As a result, it’s crucial you weigh up the pros and cons of your plans before proceeding. Some questions to consider include:
- How will taking a lump sum from pensions affect long-term finances?
- Do your plans require a varied or stable income in retirement?
- Could you use other assets if your pension was depleted too soon?
- Will using Equity Release impact your legacy plans?
- How will the costs of Equity Release escalate over ten or more years?
Seeking financial advice can help you understand the long-term impact of the decisions you make now. There are instances where taking larger sums from pensions or using Equity Release makes sense but it’s important that these decisions are made understanding potential effects. Talking about your plans with a financial adviser who understands your financial circumstances can put them into the context of wider priorities and implications.
If you’re unsure how accessing your pension flexibly could impact your long-term financial security or are considering Equity Release, please contact us. We’ll help you understand the short, medium and long-term implications of different options you may be considering.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulations which are subject to change in the future.
Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.