Alice Watson, product and communications manager Stonehaven
In the 2014 Budget, the Chancellor announced changes to pension pots that will have a significant impact on financial planning into retirement. From April 2015 pensioners will be able to withdraw their entire pension pot in cash, giving them greater flexibility when managing their finances in retirement.
Whilst it’s welcome news for those approaching retirement, financial advisers must ensure that when they’re giving advice on retirement planning they’re taking a holistic approach. This means that they must look at all of their client’s assets, and that the property is considered alongside any pension pots and investments. The home is usually a person’s largest asset and in many cases it will be needed to help provide financial comfort in old age.
With these changes the Chancellor has created a dynamic savings revolution and lifetime mortgages will play an important role, providing increased financial security for a growing sector of older homeowners who will reap benefits and comfort by maximising all of their assets. In a climate where people are living longer and pension savings will not always be sufficient, lifetime mortgages have a vital role to play. For many people, their home may end up being their only asset to provide them with both income and protection.
Whilst the impact of these changes is still yet to be seen, not everyone will choose to buy an annuity and receive a guaranteed income for their retirement. Instead, they may have an interest-only mortgage shortfall and be tempted to use their pot to clear it. We know that there are 2.6 million interest-only mortgages due for repayment by 2041, and as many as 48% of these homeowners face a shortfall at repayment day of an average around £71,000. 260,000 of these have no repayment vehicle of any kind in place. In addition to this, research from Partnership shows that 14 per cent of those who have a pension pot of £30,000 or less will be tempted to use it for day to day living or luxury products.
Alongside those approaching retirement, lifetime mortgages can be a sensible solution for those who have already retired and are unaffected by the recent legislative changes. Over the last three months, one in four of our customers have used a lifetime mortgage to clear an existing interest-only mortgage, and more and more are using it for gifting to children, home improvements and consolidating unsecured debt.
As more innovative and flexible lifetime mortgage products come on to the market, releasing equity locked up in homes provides an additional source of funds whilst offering security and peace of mind. A large number of homeowners will have benefited from huge increases in the value of their property over the years, and a lifetime mortgage offers the chance to enjoy the rewards of this while maintaining ownership of their home. Financial advisers must recognise lifetime mortgages can offer a sensible solution to some, and ensure they are considered when giving advice on financial planning into retirement.