How You Can Enhance Your Pension Income

    Enhance Your Pension Income

    If you are soon to retire, you will probably have been giving quite a lot of thought to your finances, and how you will be able to fund your retirement.

    Most people tend to rely on a combination of the state pension and a company or private pension to provide for their needs.  Since the Government changed legislation in 2015, you can choose to use your pension in whatever way you like, and you do not need to purchase an annuity.

    Research has shown that the average pension pot is around £50,000.  This might sound like a lot of money but life expectancy is increasing and you might find that you are in retirement for more than twenty years – in which case, £50,000 amounts to around £2,000 a year!  With the state pension of £154 per week (as of April 2016), you are unlikely to be having a luxurious retirement.

    Enhance Your Pension Income

    There are some options available to you to your enhance pension income.  The obvious step is to work in a job with a good pension and, with the introduction of auto-enrolment for all eligible employees in the UK, this might something that many people have in the future.  But, if you do not have a good pensions, here are some other possible options available to you:

    Rental Income From A House

    The booming property market has led to many people being interested in buying a house to let out with the prospect of enjoying income from the rent together with capital growth on the property. This can be a profitable exercise if you have enough money to be able to invest into a residential property.  However, there are some drawbacks:

    • Your house needs to be occupied by a tenant in order to generate income: if there are periods when you don’t have a tenant, you will have no income.
    • You need to consider the effect of professional charges against from letting agents, solicitors, estate agents, etc.
    • You will be responsible for maintaining the property to a good standard.
    • When you sell your home, you will be liable for capital gains tax on the profits, over and above your annual CGT allowance.
    • The Government has reduced tax benefits on buy-to-let homes and there may be more changes in the future.

    Rental Income From Your Own House

    If you have a house with a spare room, you could rent it out under the ‘Rent-A-Room’ scheme which allows you up to £7,500 of untaxed income each year for letting out your home in this way.

    Dividend Income

    You could use your money to buy stocks that provide a good dividend payment each year.   You will be able to use the dividends as a form of income and you might be able to benefit from the rise in share prices when you sell at a later date.  You will need to undertake a lot of research, or employ the services of a stockbroker.

    Part Time Job

    Many retired people choose to continue working in their current role, or something entirely different, in order to keep some income coming in.  Not only are there financial benefits to working part time but research has shown that being active in retirement leads to better mental and physical health.

    Downsize Your Home

    You could consider moving from your home to a smaller one, or to another location where house prices are cheaper.  You will need to take into account the price of selling your home, and the associated fees from estate agents and solicitors, in order to make sure the exercise is worthwhile.  There are also costs involved with purchasing another home such as stamp duty.

    Equity Release

    Another option is to consider taking out an equity release plan to enhance your pension income.   This enables you to stay living in your current house and whilst making use of some of the money that is tied up in it.   You should consult with the beneficiaries of your estate before you commit to any equity release scheme because using the capital in your house might mean that there will be nothing to pass on when you die.

    FCA Removes Affordability Assessment On Hybrid Lifetime Mortgages

    7th April 2016: The Financial Conduct Authority (FCA) announced that affordability assessments would no longer be required when a later life firm was offering hybrid lifetime mortgages.

    A consultation on the appropriate amendments for Mortgage Conduct of Business (MCOB) rules on hybrid lifetime mortgages will be published by the FCA in due course.

    Read the full FCA statement about hybrid lifetime mortgages.

    The regulator explained that these amendments could differ from its current proposals, but firms can apply to make the changes from today. The modification as announced by the FCA will be available for a year, or until any amendment is made to the rules.

    Lifetime mortgages enable consumers to pay interest for a period subject to affordability rules that are based on the requirements of providers following the Mortgage Market Review in 2014.

    Understanding the FCA’s statement

    The FCA confirmed that the modification was created because “we do not consider that an affordability assessment is required where there is no risk of arrears and repossession in the event of missed payments”.

    The modification works by “…dis-applying the requirement to carry out an affordability assessment where interest payments are anticipated or required, providing that the specific lifetime mortgage allows the consumer to exercise at any time an option to convert the product to interest roll-up.”

    Product Disclosure Changes

    The FCA’s modification will apply to product disclosure rules as part of the MCOB handbook. Later life lenders will also need to revise Key Facts Illustration (KFI) documents to include a description of the features and risks to apply when interest payments are being made and when they are rolled up.

    How does equity release help in securing your retirement?

    Types of equity release

    Before understanding how equity release can help you, it is important to understand how it works. Equity release is a scheme that lets you retain the use of your residential property, or any other property which has capital value, and provides you with a steady source of income or a lump sum amount. The minimum age for opting for this scheme is 55years.

    Types of equity release

    The two popular equity release schemes are:

    Lifetime mortgage

    This type of mortgage is different from ordinary mortgage options.  In this scheme, you take a loan by keeping any of your property as mortgage but you do not have to repay the amount of loan while you are alive.

    The compounded rate of interest is added throughout the term of the loan and when you move out, or in case of your death, the property is sold and the loan is repaid. This option does not compromise the right you have to your property.

    Home reversion plan

    In this plan, you sell the whole or a part of your house to a home reversion company and in return you get a lump sum amount or regular income. Along with a regular income option, they also provide you with a lifetime lease that allows you to remain in your house. After your death or when you sell the property, the company gets the share of the property they have bought from you.

    The home reversion company benefits from this deal when the price of the property you them increases throughout your lifetime.

    How does equity release secure your retirement?

    Either one of the equity release schemes mentioned above can enable retired or retiring people to free up the money which is tied in their property. Whether it is a lifetime mortgage or home reversion scheme, they provide you with the facility of keeping ownership of your home whilst benefiting from the rise in price of your house. There is no burden of paying the interest which can be very helpful especially if you do not have sufficient funds saved for retirement. They also provide you with the option of leaving a specific percentage of your estate as an inheritance.

    A few things to keep in mind before entering into a plan

    When you enter into an equity release in your own name

    If you have a spouse, after your death your spouse or partner may be required to move out of the house. It is very important that you discuss these with your spouse/partner.

    The loan will have direct effect on the inheritance you leave behind after your death

    The beneficiaries from your property may not inherit anything if you opt for this plan. So it is advisable that you involve them and understand the process with them.

    Make sure you have thought about moving house

    If you wish to move home but you do not want to give up the plan then you have the option of transferring it your new house.

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