Is your home the best nest egg?

Helen Monks warns of the dangers of relying on your property for a pension
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The Independent Online
As a growing number of people spend their thirties wrestling with large debts, while trying to scrape together a big enough deposit for their first home, it is hardly surprising that the same people are also increasingly viewing their property as their main nest egg.

For individuals who find themselves up to their spending limit at the end of each month, relying on their home to fund their retirement - either through trading down or equity release plans - will feel like a necessity. For others it will seem a reasoned response to historical house-price inflation coupled with a growing suspicion of pensions.

The uncertainty surrounding the pensions of employees of the department store chain Allders, which went into administration last month, is the latest example of a pensions promise seemingly broken and undermines the already floundering confidence in the worth of saving for the long term.

Research towards the end of last year by Abbey indicated that against the backdrop of house prices rising by 113 per cent since 1965, nearly three-quarters (71 per cent) of the nation's homeowners say they are relying on the rising value of their home as a substitute for long-term savings. But, as Abbey points out, the value of your home might not always go up, as many homeowners who suffered from the negative equity fallout from the housing market crash in the early 1990s will testify.

Another recent study commissioned by Prudential, written by Professor Merlin Stone, of Bristol Business School, suggested 40 per cent of people are planning to rely on property to provide them with an income in retirement. Professor Stone says this is a high-risk strategy that could easily backfire and leave many facing financial hardship and poverty in later life.

Mark Kelly, director of Norwich Union Personal Finance, agrees: "Equity release is not an answer to everyone's problems. Clearly, your home is an important asset, but it would be a pretty high-risk strategy to rely on it solely. It ought to be seen as just part of your retirement planning and not a replacement for pension saving."

The Government's pensions commissioner, Adair Turner, has warned that 12 million are not saving enough for retirement. Future generations might expect to have to save harder or work longer to pay for a moderately comfortable old age.

Government figures show the amount of time women can expect to live in poor health towards the end of their lives increased by 15 per cent to 11.6 years from 1981 to 2001. For men, over the same period, the length of poor health rose by 34 per cent to 8.7 years.

Despite these increasing pressures, younger generations look as though they are the ones most likely to be storing up financial trouble for their twilight years. Prudential's report showed people aged 25-34 are the main band of people looking at their retirement income in a property-centric way.

This is in contrast to today's equity releasers who use the cash in their homes to fund life's extras. For them, the cash is the icing on the cake, rather than the answer to the problem of failing to save.

Research by Norwich Union showed 72 per cent of its equity release customers spend the money released from their home on home improvements, and 35 per cent go on holiday. Just under 38 per cent said they were using the cash to merely "top up income". Mr Kelly says: "Many customers start to think about equity release because a large purchase is looming, such as a new car, not mainly because they are looking at ways of maintaining income in retirement."

For those currently looking to boost their retirement income through their home, there are three options: the two types of equity release schemes and trading down to a smaller property.

Lifetime mortgages involve taking out a loan secured on your property to provide either a cash lump sum or an income for life. No repayments are made until your home is sold, usually after your death - or should you leave your property because you need to go into long-term care. Then the loan plus interest which has been rolling up over the years is paid for by the proceeds of the sale of your home.

Home reversion plans involve selling a proportion of your property to an equity release provider, and then living in your home rent-free until you die and the property being then owned by the provider.

Many in the financial services sector view equity release as the next boom market. Latest figures from equity release industry body SHIP (Safe Home Income Plans) shows in 2004 pounds 1.19bn worth of new business was written by its members; and the Actuaries Profession claims the market could be worth pounds 5bn within two years, as new and established providers vie for business.

Certainly the number and weight of charges and costs levied on the plans suggest that companies do very well out of the desire to unlock equity. On lifetime mortgages, for example, interest rates are considerably more than they are for standard mortgages, sometimes as much as 2 per cent more.

Advice on home reversion plans can set you back 2 per cent at some firms, closer to 1 per cent on lifetime mortgages. You can also expect to pay mortgage arrangement fees to your lender, legal fees and valuation fees, and you might also need specialist tax-planning advice to steer your way through the inheritance tax issues triggered when you start to look at reducing the size of your estate. All of this can run into thousands.

But trading down is not without its costs. Dean Mirfin, business development director of independent equity release specialists Key Retirement Solutions, asks clients to think about the full picture regarding the cost of trading down: "Say you have a pounds 200,000 property and you want to release pounds 30,000 by trading down, you might think you may only need to move to a property worth pounds 170,000.

"However, let's say you want to stay in the same area and your next property needs certain improvements. Also, you need to factor in the impact of stamp duty, legal and mortgage fees, plus moving costs, and all of this means you might need to shave thousands more off the possible price of your next property to buy yourself that pounds 30,000 slice of equity." With less cash than you might have originally banked on, you may not be able to find a property that you would be happy to live in.

That said, trading down remains a typically less expensive and more straightforward transaction than equity release. However, there is also the psychological toll to deal with when moving later in life. The upheaval of abandoning the home in which you may have lived and brought up your family for decades, surrounded by neighbours you know and familiar amenities, ought not to be underestimated.

Both equity release and trading down have serious financial and emotional costs, which ought to be weighed up with great care and, arguably, with the help of a reputable independent financial adviser who specialises in post-retirement planning.

Mr Mirfin says that a good adviser will ask you questions such as how long you have been considering choosing equity release against the other options; and they will also assist in weighing up the pros and cons of trading down or even of doing nothing and staying in your own home, without buying into equity release, if this looks to be the most appropriate option for your circumstances.

THE INCOME YOUR HOME COULD DELIVER

n pounds 500,000 property

If a couple, both aged 70, owned a property worth pounds 500,000 and wanted to secure an income for the next 15 years of pounds 500 per month net, they would need to release pounds 95,000 through a typical lifetime mortgage. The total they would owe after 15 years would be pounds 253,071.

n pounds 350,000 property If a couple, both aged 70, owned a property worth pounds 350,000 and wanted to secure an income for the next 15 years of pounds 350 per month net, they would need to release pounds 65,500 through a typical lifetime mortgage. The total they would owe after 15 years would be pounds 177,149.

n Contacts:

Norwich Union www.norwichunion.co.uk 0845 302 0111;

Key Retirement Solutions www.keyrs.co.uk 0800 064 70 75;

Prudential www.pru.co.uk 0845 600 1564;

Abbey www.abbey.co.uk 0845 7654321;

Source: Key Retirement Solutions

`Equity release gave us a great new life - without having to lose the old one'

IRENE AND Gerard Nuttney have no regrets as they enjoy the benefits of releasing some of the equity locked in their home without moving.

The retired civil servant and self-employed fitter from Newcastle have bought a new car, conservatory, bathroom and kitchen with their equity, as well as being able to afford dodging the harsh North-east winter by spending months in Australia since they took out the scheme with Norwich Union last year.

The cash released has allowed them to pay for improvements in the quality of their lives while their individual private pensions take care of day- to-day living expenses. Irene, 64, says: "We are enjoying our retirement and we feel releasing the equity isn't really costing us anything. We discussed it with our children beforehand and they said that we should go ahead and enjoy ourselves rather than pass the assets on to them."

For Irene and Gerard, 70, leaving the four-bedroom home they have lived in since 1966 was not an option.

"We moved here four years after we were married and have good neighbours. It's probably a bit big for us now, but we couldn't imagine ourselves anywhere smaller; this way there's plenty of room for the grandchildren," says Irene.

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