Anyone who has recently settled a utility bill, visited a supermarket or filled their car with petrol will recognise the extent to which prices have risen since the turn of the year.
Economists have discussed the potential threat of inflation for several years, but their conversations have appeared detached – the stuff of dry, academic debate rather than the real world. No longer. A once veiled inflationary threat has mutated into reality with a vengeance, exceeding expectations, surging towards double digits.
The International Monetary Fund (IMF) does not expect a re-run of the 1970s when the oil crisis hit the world economy and annual UK inflation reached 26pc. Nonetheless, today we must cope with the fallout from Covid and the aftermath of a bloody war in Ukraine. We should expect the cost of living to continue rising.
While inflation remained subdued, millions of people could tolerate underperforming pensions, even as their savings earned historically low levels of interest. Today, however, many retirees could use a boost to their retirement income.
According to the Pension and Lifetime Savings Association, the size of the average UK pension pot is £61,897, a level that would presently buy an annuity of approximately £3,300. Add the full state pension of £9,627 and the total is a shade under £13,000. By contrast, from April the adult minimum wage equates to £18,240. Little wonder that retirees and other older folks could do with a leg-up.
Fortunately, there are several ways by which a pension pot could be improved. Reducing fees and other charges is one simple way of doing this; retaining more in the pension pot will improve returns.
Tracking down missing pensions could also pay dividends. Around one in six workers lose track of old company pensions once they move jobs, while 76pc have no idea how much their contributions are worth. Forgetting about (or worse still, ignoring) a pension is equivalent to throwing money down the drain. The Association of British Insurers estimates that £19.4 billion lies lost or unclaimed in UK pensions.
Homeowners aged 55 and over who are looking to address the problem of a longer-term escalation in the cost of living by increasing their retirement income have several additional options available to them.
Perhaps the most obvious alternative is to sell their existing home and release a proportion of the equity by downsizing. This is not, however, everyone’s cup of tea. People who have lived in the same property for decades have little desire to abandon the memories associated with it by moving to a smaller place, assuming one can be found. Moreover, the costs associated with downsizing (estate agency fees, legal expenses, surveyor costs, stamp duty, etc.) can rapidly reduce the amount.
If selling your home is not your preferred choice, you could take advantage of a financial product called a lifetime mortgage. This enables you to release a portion of your home’s value as a tax-free lump sum (funds may also be withdrawn in stages) without the corresponding need to make monthly payments.
It’s worth noting that when releasing equity, you do not sell any of your home and continue to retain 100pc ownership, in addition to preserving the right to live there until you either die or move into permanent long-term care. This means that the lifetime mortgage will only become due for repayment after one of these significant events and is usually achieved by selling your home.
Releasing equity from the home is not a decision anyone should take lightly. The process could, for example, reduce the value of your estate and it may also affect your entitlement to means-tested benefits.
Nevertheless, the boost in disposable income you may enjoy as a result of releasing equity could be timely as Mark Gregory, CEO of Equity Release Supermarket, the UK’s largest independent broker, explains.
“Inflationary pressures tend to have a greater impact upon people who live on fixed incomes, as many millions of pensioners do. Fortunately, a sizeable proportion of homeowners aged 55 and above can counter the corrosive impact of inflation by taking advantage of the equity built up in their homes, usually over many years,” says Mr Gregory.
There are, of course, many other uses to which the money released from your home could be applied. One of the most popular is home improvements, with a new kitchen or bathroom near the top of the list. While taking professional advice is an absolute necessity before starting the equity release process, the means by which a retirement income conundrum can be solved is closer than many people imagine.
For more financial advice, check out Peter Sharkey’s regular blog, The Week In Numbers.
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