The increase in life expectancy and the demise of generous final salary schemes means that many people will need to leverage all of their non-pension assets, including the equity in their home. Many of your clients approaching and in retirement may potentially have more wealth in their home than in their pension pots as Britain’s over-55s hold around £1 trillion in housing wealth.
Whether to help generate an income, maximise tax efficiencies or for legacy planning, equity in the home can be used in a variety of different ways as part of a holistic retirement plan.
We've given a short overview of some of the options:
Downsizing - At the point of retirement or at a later date, it can make sense to downsize. The house may be too big after the children have left home and the upkeep of the home could become challenging. The money freed up from downsizing could be used to help fund retirement, support family or pay off a mortgage. However, the cost of moving also needs to be taken into account, stamp duty, solicitors and estate agent fees alone can see costs run into thousands of pounds which can significantly reduce the proceeds made from downsizing.
Equity release - It’s sometimes suggested that retirees occupying larger homes should free up this housing stock for families. Yet 49% of those wanting to downsize found a lack of suitable properties available. Inflated prices, high moving costs and a lack of availability are proving problematic for potential downsizers. Many people are reluctant to sell the family home. They value their neighbours and the local community they’ve lived in for many years and don’t always wish to move. These are just some of the reasons which can make equity release an attractive alternative. Any equity released is currently tax-free and it could be used to provide an income for your client. It could also be used to fund a direct gift, which under current legislation is treated as a potentially exempt transfer (PET) and therefore free of inheritance tax (IHT) if the donor survives for seven years from the date of the gift.
Nil rate bands - From April 2020, up to £500,000 or £1m for a married couple, can be passed to a direct descendent on estates worth under £2m using the nil rate band and residence nil rate band. It could make sense to ring fence the amount that is not subject to inheritance tax (IHT), to best utilise any available nil rate band allowances.
Rent a Room scheme - It may also be worth mentioning the government’s Rent a Room scheme. This isn’t about leveraging the equity in the home, but renting a furnished room in the client’s main residence. Under the scheme, someone renting a room can generate a tax-free income of up to £7,500 per year.
Some of your clients approaching retirement may be considering using the equity in their home to free up cash, maximise tax efficiencies or for legacy planning. Whatever your client’s overall retirement goals, property can play a key part in a layered approach to retirement planning where all your client's assets are used to produce the best possible outcomes.