For the generation of baby boomers, the prospect of retirement can be a little daunting. This generation of people who were born at the end of the Second World War, may have planned for their retirement well, but the economic climate may have put a dent in their plans.
Why baby boomers may struggle in retirement
The main reason that the generation of baby boomers may struggle in their retirement is down to the ageing population in the UK. Many people are living far longer which means that the period in which they are retired is even longer. While this may seem like a great thing, for those who are struggling on a restricted income, this can mean they are placed under further financial strain. Added to this is the huge increase in the cost of living in the UK. Many people have felt frustrated by the price increases of basic utilities and other costs, but for someone with a fixed income, there is no way to gain a pay rise in their pension. For those who are limited to a state pension, they are at the mercy of budget changes and the effects of quantitative easing.
Even those people who have adequately planned for their retirement and paid off the balance of their mortgage while they were still working, may find that their pension income no longer stretches as far as they anticipated. This can be very disappointing for those who have sacrificed during their working lifetime to ensure that they have a comfortable retirement only to find that they may struggle to make ends meet.
How equity release and retirement mortgages could help the baby boomers
Equity release and retirement mortgages allow home owners to leverage the equity which is locked in their home. While in the past, many retired people were forced to down size to a smaller property in order to gain access to this equity, equity release allows the home owner to obtain a loan secured on the property, while retaining the right to live in the home until such time as they move into a care facility or pass away.
Many retired home owners can have considerable fund locked in their property but be cash poor. A great number of equity release schemes allow for home owners to receive a tax free lump sum or additional monthly income without needing to pay a monthly repayment. The interest accrued on the loan is compounded on the loan balance, which becomes due for repayment when the property is sold after the home owner has passed away.
Retirement mortgages are a slightly different type of financial solution. These still provide a loan to gain access to the equity locked in the home. However, these types of product will generally require a monthly payment to cover all or part of the interest charges and maintain the level of the loan balance.
The advantages and disadvantages of these schemes
As with any type of finance, there are advantages and disadvantages associated with these products. These vary according to the specific terms of the product, but there are some general factors which should be considered.
Equity release has a number of advantages including that there are a number of different schemes and plans which can suit myriad circumstances. There are roll up lifetime mortgages which allow the interest to be compounded on the loan and require no monthly payments. Other types of equity release include home reversion plans, which allow the home owner to sell all or part of their home to the company, while retaining residency rights for the remainder of their lifetime.
The disadvantages of this type of arrangement are that it can have a significant impact on the funds available from the eventual sale of the home to pass on to beneficiaries. For example, the balance of a roll up lifetime mortgage is estimated to double approximately every eleven years. This can mean that the balance increases dramatically. However, there is regulation protection to ensure that regardless of the duration of the equity release scheme or property market, no equity release plan will allow an estate to inherit a property debt to be passed on to the beneficiaries.
The advantage of retirement mortgages is that the balance of the loan is more in the control of the home owner. This can allow a greater degree of inheritance planning. However, they do usually require some form of monthly payment to cover the interest, which can be difficult for those with a restricted disposable income.
If you are one of the generation of baby boomers, and are worried about your retirement, equity release or retirement mortgages may represent a viable finance method. It is worth taking the time to research your options and speaking to an experienced equity release adviser.
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