Almost everyone I speak with would like to retire early. But having the luxury of early retirement doesn't come to everyone, and often money is the main reason why we are retiring later in life.
But what if there were a way that your property could help you afford to retire early?
If you have opted for early retirement, have been made redundant before state pension age, or would like a top-up to your private pension income, equity release could provide the money you need. If you are a homeowner aged 55 years and above, you are eligible to use equity release to help fund your early retirement.
However, just because you can take equity release, it doesn't mean that you should. It would be best if you considered the broader implications, and also all other options that are available to you.
In this guide, you will learn:
Having confirmed that equity release could be used to help fund your early retirement, an important consideration is whether it is a good idea?
A benefit of an equity release plan is that you are not required to make any payments while you are living in the property. However, if you choose not to make payments towards an equity release, the amount that you owe will increase over time.
The most popular form of equity release is a lifetime mortgage. This particular type of mortgage does not require monthly payments but does still attract interest. And if you do not make payments to clear the accruing interest, you will be charged compound interest; which is interest on top of interest.
Remember that any property growth is also compounded each year. However, the younger you are, the more years the plan is likely to run, and the more the interest can roll-up.
An option you can consider is paying off some, or all, of the interest on the funds that you release as it accrues. Most equity release plans allow you to make voluntary payments well above the interest accruing on the loan. However, this is going to increase your outgoings each month, and it will be more cost-effective to borrow less, rather than borrowing more. Especially if you're planning to use extra equity release funds to help service the interest.
Luckily, there is a type of plan which could help, called a drawdown equity release plan.
Another option to consider is a drawdown plan which could reduce the amount of interest you will pay over the longer term.
Drawdown plans allow you to take an initial lump sum and then hold the remaining funds in a reserve facility to 'drawdown' in the future as you need to.
You will only accrue interest on the initial lump sum that you release, and then on any additional funds which you drawdown in the future.
I usually suggest that you take enough initially to cover you for the next year or two, and then hold the remainder in reserve. Subsequent drawdowns will typically need to be a minimum of £2,000 to £5,000, but this does vary by plan.
The result is that you have access to funds as and when you need it, but importantly you aren't stuck being charged interest on money that you are not spending.
The difference in overall cost can save you thousands of pounds!
I have a more extensive guide here: What are equity release drawdown plans?
There are several factors to consider when trying to calculate how much money you need to retire early:
- The net amount of cash which you require each month,
- How much you can fund without equity release, and,
- How long you need the extra funds.
For this article, we will focus on bridging the gap between retirement and receiving state pension and having enough to live on after reaching state pension age.
However, if you wish to receive funds past state pension age, this will not be a problem. The only additional consideration will be how much you will need once you receive the state pension, and how long you will likely need the extra funds.
We need first to consider your current age, and when your state pension is due:
|Year of Birth
||State Pension Age (for both male and female)
||66 & 11 months
The table assumes the 15th of February each year for the information given. Find your specific state retirement age at Which?.
The maximum amount that you can achieve on your equity release is largely based on the age of the youngest homeowner, and the value of your property. There are more specific underwriting conditions which could reduce the maximum amount available to you. However, for a standard construction freehold house in England, worth more than £150,000, you can achieve the following:
|Age of youngest homeowner
||Maximum percentage of the property value which can be released (LTV) with a lifetime mortgage (equity release)
Alternatively, you can use our equity release calculator on this page, or see our equity release calculator, and accompanying guide.
The value of state pension which you receive will depend on your National Insurance record, and how many years that you have paid National Insurance contributions.
People reaching pension age now will need 35 years of contributions (NICs) to get the full state pension (which is currently £175.20 per week).
If you have missed contributions in recent years or will miss payments if you consider early retirement, you can pay extra contributions to fill in the gaps.
The National Insurance voluntary contribution rates for the 2020 – 2021 tax year are £15.30 for Class 3 and £3.05 for Class 2. The NICs that you can pay voluntarily usually are Class 3 contributions. Still, if you're self-employed or working abroad, you can pay Class 2 contributions instead.
For more information on National Insurance payments, please visit https://www.gov.uk/national-insurance.
You will also be able to find out how much you can expect to receive when you reach your state retirement age by visiting https://www.gov.uk/check-state-pension.
You may wish to look at taking on part-time work alongside an equity release to top up your income before receiving your state pension.
Equity release is not classed as income, so as long as you keep your annual earnings under £12,500, you will not be liable for any income tax. Plus you will be able to top up your income with equity release tax-free.
Money released that is held in your bank account is, however, classed as savings. Therefore you will need to keep the amount in your bank accounts under £10,000 to keep your full entitlement to any means-tested benefits you are in receipt of (including pension credit and universal credit).
Once you are receiving your state pension, any money you earn won't affect it. However, it may affect your entitlement to other benefits such as pension credit, housing benefit and any council tax support. You will need to be aware that your state pension is taxable, so when you add it to any earnings, you have it may affect your tax liability. Also, there isn't a savings limit for Pension Credit, but if you have over £10,000, this will affect how much you receive.
For further information, please see https://www.gov.uk/pension-credit and https://www.gov.uk/benefits-calculators.
It may be that you have a private pension which you can draw upon for further funds. With most personal pensions, your provider will have set an age when you can start taking money from your pension pot. Most are not actually from age 55, so you will need to contact your pension provider to find out what age your pension is available.
With a private pension, you can take up to 25% of the money you have built up as a tax-free lump sum. Once you have taken the initial lump sum, you then have six months to start taking the remaining 75% which you will usually pay tax.
There are options you have for taking the rest of your pension pot, and these include:
- taking all or some of it as cash
- buying an annuity for life that gives you a guaranteed income
- investing the funds to get a regular, adjustable income which is sometimes known as 'flexi-access drawdown'
For further information, see https://www.gov.uk/personal-pensions-your-rights/how-you-can-take-pension.
I am not a pension advisor. However, I am happy to work alongside any pension, wealth, or tax planners you have, for you to receive your money in the most efficient way possible.
Having considered all your options now may be an excellent time to get in touch with us. We can help work out the most appropriate form of action for you, and provide you with a detailed plan of your equity release options.
If you have further questions, why not speak with one of our qualified advisors?
Call us on 0207 158 0881 or use our online form to book your FREE consultation.
While a qualified equity release advisor has written this guide, it is not intended to be used as financial nor legal advice and should not be relied upon.
To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.
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