Property ladder

There is a huge disparity in the housing wealth accumulated by the UK’s over-55s and many young people who are finding it very difficult to get a foot on the ladder. First-time buyers are struggling to get together the deposit to buy their first home (and pay all their bills), while at the same time older homeowners are living longer than ever before and are finding that their retirement income is not meeting all of their needs.

Off the scale

Therefore we have two problems at either end of the scale – an inability to afford property and an inability to afford retirement. However, there are a number of solutions, and the government is beginning to widen its net as it look for ways to solve these problems.

In January Grant Shapps, minister of state for housing and local government, announced government plans to help elderly people to downsize their properties, based on a pilot scheme by Redbridge Council. The idea is that older people who may be living in houses that are larger than their needs move into alternative accommodation (such as sheltered housing) while renting out their home.
In principle, the local authority would take over responsibility for maintaining and renting out the property, with any profit from the rental income transferred back to the homeowner.

While this at least attempts to address the need to find a way of closing the property gap between young and old, there seem to be numerous pitfalls to the scheme. First, there is the assumption that older people would want to move from their home. This is not necessarily the case as the owner may have lived in their home for many years and built up a sentimental attachment – especially if it was the ‘family home’ that they raised their children in.

Furthermore, these homeowners are likely to have a network of friends and family within their local community whom they are unwilling to move away from. There is also the issue of the quality of the accommodation provided by the local authority – if it will be a move downwards in size then there is no guarantee that it would be of the same standard as the home they are leaving.

There also seem to be unanswered questions about the administration of the scheme. There is likely to be a huge cost in setting it up, without knowing the number of homeowners who would take part.
In addition, although the plans suggest that the local authority would take over the maintenance of the property and liaise with the tenant, what would happen in the event of major damage to the property? Again, a lot of people with emotional ties to their home would struggle with the idea of someone else living there without an assurance that the property would be kept in the same condition as they had once done.

Lifetime guarantee

Despite these concerns, it is not to say that downsizing isn’t something older people should consider. As longevity increases, many people will find themselves living far longer than they ever anticipated – or financially planned for. The removal of the default retirement age (DRA) in October 2011 means that people who are healthy and willing have the opportunity to choose to work beyond the traditional age of retirement.

However, the current job market and health issues mean that this is not an option for everyone. If someone retires at the age of 65 they could well be looking to fund a further 20 or 30 years of their life without any earned income. As such, many people will have to consider using their property to fund their retirement.

Downsizing might be an option, organised by the individual and so that they move from the property completely and release the difference in the value of their old property from their new, smaller one. However, as mentioned before, this does have drawbacks as the homeowner might not be able to downsize to a property in the same area or near loved ones. There is also the time, cost and stress of having to move, something that many older homeowners find particularly difficult.

An alternative for homeowners aged 55 and over is equity release – which provides them with a way of accessing the wealth tied up in their home without having to leave it. There was once a stigma around the equity release customer as being on the financial brink, with the products bought as a last resort. However, this has long since been dispelled and we now see people using their properties in this way for ?a whole raft of reasons.

Equity release can and has been used by homeowners to pay off debts, make household renovations (thus increasing the value of their home), or simply to fund a more comfortable retirement lifestyle. Indeed, equity release is now one of many financial planning tools and could be used in conjunction with downsizing to release a sizeable sum of money; a homeowner could downsize to a smaller property or a more appropriate property such as a bungalow – therefore releasing the difference in the value of the properties – and then drawdown the equity from their new property in instalments as and when they need it. The whole point is that older homeowners who have built up a significant portion of housing wealth now have the ability to choose how to use it, and can tailor the products available to their needs.

Customer care

One of the main reasons people might adopt a more customised approach to retirement is to pay for any possible care needs they have. As mentioned, people are living longer than ever before and therefore the number in need of long-term care is also increasing. Most people do not want to think about this possibility – and those who do consider it generally do not know how much they should put aside.

Therefore there is a shortfall in the amount they have put aside and the amount they need. With an increasingly aged population, it is clear that the government cannot provide financial support for everyone who might need it. Once again, equity release provides a solution whereby people can use ?the wealth from their home to pay for their care needs, secure in the knowledge that it is still their home. This may be for domicillary care or to pay ?for the care needs of a loved one.

Equity release and downsizing are both viable retirement planning tools and can provide a real boost to an income. However, they will not be right for everyone and people should consider all of the options at their disposal. A person’s home is often their largest and most valuable asset and they should make sure they treat it as such.

Andrea Rozario is director general at Safe Home Income Plans (SHIP)