Alarm bells always go off in my head when I hear from readers who suggest that their family home, ‘is going to be my pension’ some day.
This is a pretty common illusion, and not just here in Ireland. A recent survey in the UK, where the private pension take-up (of about 50%) and the high dependency on the state pension (again, about 50%) mirrors our own low coverage and savings, is that more than two out of five (41%) of homeowners in the run-up to retirement are now banking on their family home to supplement pension income.
Just over half of younger homeowners in the 45-54 year age group also say that their family home will have to make up part of their pension some day.
So are nearly half of all retirees really going to sell their home and live off the proceeds? Are they all going to all rent out spare rooms – tax-free in both our countries under respective Rent-a-Room schemes – to supplement their low pension income?
Will they revert to home equity release loans that don’t have to be repaid until they die (or sell the Property)?
(The UK survey found that as many as 27% of homeowners aged 65+ would opt to access tax-free equity in their homes before accessing retirement savings that are liable to income tax.)
Let’s look a little closer at each assumption and see whether they hold up financially.
A great advantage of home ownership, after the ‘utility’ value of having a roof over your head is that there is no capital gain tax liability when you sell your property.
Tax free proceeds could go some way to boosting an inadequate pension income if you can find a cheaper property to buy or rent. However, leaving a much loved family home/garden can be emotionally wrenching and you need to accept that ownership still means paying insurance, rates, utilities, maintenance costs and property tax. (Property related taxes can be substantial if you decide to move abroad.)
The way to mitigate these bills and boost your pension income is assumption number two, the €12,000 a year tax-free Rent-a-Room scheme which is like getting another annual state pension in income every year, without a tax bill.
It may trigger a social welfare means test, especially regarding payment of a non-contributory pension, that is, unless the owner was already living alone.
The obvious downside of the Rent-a-Room scheme is that you have a stranger or strangers living in your home, perhaps using a shared bathroom and your kitchen facilities unless you can offer them an en-suite bedroom or say, an attached granny-flat with a kitchen.
(Elderly neighbours of mine who would otherwise be alone and who rent rooms to nurses from St James’ Hospital in Dublin are delighted with their Rent-a-Room lodgers.)
The third assumption – home equity release – has not resumed in Ireland, but is still available in the UK, where house prices never crashed from 2008 and are still very high.
Equity release allows you to borrow a percentage of the value of your home (usually starting at 20% if you are 60 or over) without having to repay it in your lifetime if you remain in the property.
In the case of Seniors Money, which had been the most active lender before they suspended lending in 2012, the loan amount then goes up by an additional 1% per year of age.
‘Lifeloans’ or ‘reverse mortgages’ as they are known, must be repaid either from the borrowers estate after death, or from the proceeds of the sale of the house and the interest (which continues to accrue) is usually several points over the typical mortgage rate. Both interest and capital must be repaid.
The downside of equity release is that the value of the property might go down (as it did post-2008) and there will be less for heirs to inherit or for the owner to use if the home must be sold, say to pay for residential or long term nursing care or because they want to downsize.
Seniors Money always guaranteed that borrowers would never be in negative equity, that is, where the reverse mortgage was worth more than the market value of the home – but in the worst case owners could find that while they continued to live in the property, they no longer owned any equity in it and wouldn’t until market values went back up.
There are other ways to earn some money from your property – by selling part of a large garden (ideally with planning permission in place); by renting out an unused off-street or garage parking place (there’s bid demand in city centres for apartment parking) or even renting storage space in your house. And let’s not forget about Airbnb.
But will it be enough to boost your pension, after tax?
The only way to ensure that outcome of course is to start saving and investing early for a good private pension from day one. Either way, take professional financial and tax advice first.
If you have a personal finance question for Jill, please email her at firstname.lastname@example.org or write
to Jill Kerby, The Munster Express, 37, The Quay, Waterford, X91 DC83