This article was first published on 4th May 2018
Talking to a friend this week, we were bemoaning the fact that as retirees we are cash poor, asset rich.
Living in the South East we own property which is worth a lot on paper but is negative for cash flow not positive. Council tax keeps increasing at a rate faster than inflation and energy bills seem to be a tap that drains money and is impossible to turn off.
We have pension assets which we hope will mean we are comfortable for the rest of our lives but which only provides ‘just enough’ income now.
When we have a major capital spending need – a major repair to the house or helping kids onto the property ladder – the answer is often ‘not now’ or ‘can we delay something else to make the cash flow work’?
So what is the answer?
If you are cash poor AND asset poor, the answer may be “rent a room”. There is a generous government allowance that means that the first £7,500 of income received from renting out a spare room is tax free.
But, if you are asset rich there are many other things you can consider:
Re-mortgage your home
I am talking here about a small loan, say 10% of the equity, over a 15 year period (with the proviso that you can afford the repayments. The high street banks are slowly waking up to the fact that on average people are living well beyond age 65. People of any age should be given access to finance secured on their property if they can afford the repayments. Any other policy smacks of age-discrimination. Interest rates are still exceptionally low. Why should older people not be able to take advantage of this?
Lifetime Mortgage rates continue to fall. According to the Equity Release Council – Spring 2018 Market Report, the average interest rate being paid by customers in 2017 was 4.44%. While the rate for a standard lump sum lifetime mortgage (fixed for life) is around 5.31%, the rate paid on smaller periodic ‘drawdown’ products was only 4.17%.
70% of insurance providers now allow customers to “make ad-hoc, penalty-free voluntary or partial repayments” and many have introduced products that allow the consumer to restrict the amount of interest rolling up on the loan.
One of the benefits of Income Drawdown is that you have flexibility over how much income you take each month. If you have a special purchase to make or need to fund a repair to the home you can increase the income you draw.
However, care needs to be taken. Firstly, dipping into your Drawdown Account too frequently, in addition to your regular income, could jeopardize your main objective of making the fund last for the rest of your life. Secondly, you will need to be careful that the extra income you take will not push you into a higher rate tax band at the end of the year.
The more income sources you have, the greater flexibility you will have when managing cash flow. Income from a part-time job or a spouse’s income – arriving at different times of the month – will help.
An investment property or ‘buy-to-let’ is also a significant source of extra income for many people.
‘Financing Retirement – generating income from property’ is the subject of our Members’ Forum on 6th October. Our experts will discuss ‘buy-to-let’, Lifetime Mortgages and the importance of managing cash flow. More details can be found in the ‘Coming Soon’ section below. Book now for what we expect to be a very popular forum.