Your home as a pension?

We have previously discussed ways of using your home as a way of finding extra funding in retirement. Times obviously change, and it now looks as though this may be less useful a route than previously. Falling values of houses means that there may be less capital in the property to use for equity release, or any other similar arrangement. Of course if there is still an existing mortgage on the property, then the available capital will be reduced by more than the fall in the property value – the amount you owe stays the same, the drop in house price impacts on the difference between the mortgage and the full value.

Recent research suggests that over 3 million people in the UK are relying on their home to provide a pension for them. The fall in house values over the last couple of years means that the capital available by this means has reduced by around £29 billion.

While this makes good publicity for pension companies, they do sort of forget to mention what has happened to pension funds over the same two years. If you had money in shares for the last two years, then during the period the FTSE has fallen from around 6500 to around 4700 – depending upon where your house is, you could well have been better off with the house than with the pension fund invested in the stock market.

The other point the pension sellers will make is that your pension will carry on for the rest of your life, whereas a lump sum released from your house will offer very poor returns at present if placed in a savings account. You could buy an annuity – at the moment, £100,000 should buy an annual £6,400 or so for a 60 year old male. This is single life rate, so if you have the misfortune to die at 61, the annuity seller does pretty well out of the deal. You can take a guarantee to ensure that a dependent benefits within a certain number of years, but that will of course reduce the pension paid to you.

Private pensions are, frankly, pretty poor at the moment. What you can buy with a fairly large sum of money pales utterly in comparison with what is seen as necessary for people at the top of our businesses and government. An MP with 13 years’ service will retire with a pension which would take the average earner in the UK 60 years to acquire –and after 20 years service an MP will have a pension of some £30,000 p.a.. The pension which Gordon Brown will enjoy would need something like £1.75 million to buy.

Suddenly, having £200,000 capital from downsizing or equity release doesn’t seem too spectacular. Things would be so much easier if we knew how long we will live.