More people would rather bridge the shortfall in their pension by releasing equity from their home than by saving money in a separate scheme.
That’s according to independent financial adviser Hoxton Capital Management, which has uncovered evidence the average person’s total pension pot is £210,000, which is £150,000 lower than the £360,000 needed by UK residents to maintain their standard of living in retirement.
Nearly half the people it questioned said they would rather bridge this gap in their likely final pension pot by using equity release. This compared to just over a quarter who said they would save separately into personal pension scheme.
But Hoxton is warning anyone considering this route that it could reduce the equity in their property and therefore the amount beneficiaries receive.
It advised that releasing £50,000 could cost homeowners £133,000 over 20 years and if interest rates went up this could reach £166,000.
No negative-equity guarantees
Chris Ball, managing partner at Hoxton Capital Management, said: “If interest charges build and you live for a long time after taking out a lifetime mortgage, total debt could also eventually exceed the value of your home.
“That’s why it is also advisable to look for no negative-equity guarantees, so that family will not have to repay more than the property is worth when the scheme ends.”
Hoxton said the demise of final salary pensions coupled with increases in the cost of living outstripping wage growth, not to mention house price rises, have contributed to the rise in popularity of equity release.
But Ball is concerned many people do not consider the costs associated, including the requirement to obtain independent legal and financial advice.
He added: “People don’t seem to realise that their house will need to be given a valuation by a qualified chartered surveyor and they will also need to pay for professional advice when paying for an equity release scheme.”
Increasing your income or receiving a cash sum, Ball added, could also affect any benefits you are currently receiving.
“The higher your income, the less benefits you will be entitled to receive so where you many gain on the one hand, you will lose on the other. Most people who use an equity release scheme lose their benefits, which can put them at a real disadvantage,” he concluded.
