Leaning too hard on your home?

Published 09th Aug 2007

Changes in lifestyle have prompted many Brits to crave early retirement, however due to inadequate pension savings and false confidence in the housing market, they may have put all their eggs in one basket

Equity release has seen a dramatic surge over the past six months and two in every seven property owners now plan to go down this route when they retire. Whilst this is a viable option for many, most schemes will see pensioners paying off the new loan they take out against their house well into their seventies and eighties.

One in two homeowners plan to downsize when they retire, many of whom have directly profited from the property boom of the last ten years. This means that the capital they free up through the sale will allow them to supplement their pension and maintain the lifestyle they have become accustomed to. This is definitely a neat way to supplement any pension savings, however relying to heavily on money from property should never form the crux of anyone’s pension planning.

Property may seem like a robust asset class right now as far as generating good returns go – indeed the latest Halifax House Price Index has shown an 11.2 per cent increase in property prices so far this year – although it’s best to beware as rising interest rates could well become the catalyst for a housing market crash.

Worries about leaning too heavily on the equity contained within property have not been assuaged by the fact that one in four people now see rising house prices as a valid reason to cut back on their pension spending. Issues of inflation alongside the annuity rate associated with a pension scheme means that your savings go a lot further to give you an annual income in retirement and whilst the capital generated by the sale of your home will go far, it will not cover the same ground that equal amounts paid into your pension scheme will.

Even though a quarter of people admit that they are cutting back on their pension contributions in favour of selling their home when the time comes, a huge five out of nine Brits fear that their pension pot may hold an insufficient amount of money to retire on, even if they increase their contributions from now until then.

The age group facing the direct consequences of their irresponsible actions – those currently aged between 34 and 57 years old – are some of the most disillusioned about the size of their retirement fund. Forty-year-olds are the most likely to consider equity release schemes, a big indicator why over half of people aged between 42 and 49 years old consider maintaining their mortgage repayments to be more important than making pension contributions.

David Kuo, head of personal finance at Fool, advised: “It is vitally important to maintain a proper balance to ensure that we are not overly dependent on any one investment. It is tempting to think that we can ignore other investments just because the value of our home has gone up significantly. They often say that a man’s home is his castle, and it seems that for seven million homeowners the home is also a pension fund. But building castles in the air is a dangerous strategy, especially if we haven’t put down solid foundations first.”

There is a huge difference between wanting to sell your home to free up some extra cash and feeling like you must do so otherwise you risk being able to comfortably afford to live – a decision you may live to regret.
By Ariane Buteux

Source: ' Personal Finance & Savings '

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