Can you use equity release to take early retirement?
Many people in the UK dream of retiring early and enjoying the golden years of their life, and there are a variety of reasons why. Some people retire early because they want to enjoy their retirement while they are still healthy enough to pursue their hobbies and interests. Others may have health issues that make it difficult for them to continue working, or they may have experienced job-related stress or burnout.
Page last updated – 20th February 2023
In fact, a survey conducted in 2021 by Hargreaves Lansdown found that 39% of UK workers aged 55 or older want to retire before the age of 65, with 11% of those hoping to retire before they turn 60. The same survey also found that the most common reasons cited for wanting to retire early were a desire to enjoy retirement while still healthy (38%) and wanting to escape job-related stress and pressure (36%).
Family obligations can also play a significant role in someone’s decision to retire early. For example, they may need to care for aging parents or young children, which can make it difficult to work full-time. In addition, many people who have built up sufficient savings or passive income streams may choose to retire early for financial reasons, as they feel they have reached a level of financial independence that allows them to enjoy their retirement.
When it comes to work-life balance, many people value their personal lives more than their careers, and early retirement can provide the opportunity to focus on what’s truly important to them. In fact, the Over-50s Lifestyle study published in March 2022 by the Office For National Statistics found that 42% of people aged 50-69 are considering early retirement, with reasons including a desire for a better work-life balance, health issues, and caring responsibilities.
It’s worth noting that early retirement isn’t always feasible for everyone, as it requires careful financial planning and saving. However, for those who are able to retire early, it can provide a much-needed break from the daily grind and allow them to focus on what truly matters to them.
Equity release is a financial product that allows homeowners to access the equity tied up in their property. It can be a useful way to generate income or access cash in retirement, but it’s also possible to use equity release as part of a plan to retire early. In this article, we’ll explore how equity release works and how it can be used to help you retire early.
What is equity release?
Equity release is a special type of loan that is secured against the value of your property. It is available to homeowners aged 55 and above, and the amount that can be borrowed is based on factors such as your age, the value of your property, and any outstanding mortgage debt.
The two main types of equity release are a lifetime mortgage and home reversion plan. Lifetime mortgages are the most popular type, and they allow homeowners to borrow a lump sum or to receive regular payments based on the equity in their property. The loan is repaid when the property is sold, either after the homeowner’s death or when they move into long-term care. Home reversion plans, on the other hand, involve selling a percentage of the property to the equity release provider in exchange for a lump sum or regular payments. The homeowner retains the right to live in the property until they die or move into long-term care, but they no longer own the portion of the property that has been sold.
How can equity release help you retire early?
Retiring early can be a daunting prospect, particularly if you’re concerned about having enough income to support your lifestyle. However, equity release can provide a source of income that can help you to retire early and enjoy your golden years.
Here are some of the ways that equity release can help you retire early:
Generate additional income
Equity release can provide a lump sum or regular payments that can be used to supplement your other sources of income, such as your pension or investments. This can help to increase your overall income, making it easier to retire early without worrying about your finances.
Pay off debts
If you have outstanding debts, such as credit card debt or a mortgage, equity release can be used to pay off these debts. This can reduce your monthly expenses and provide additional cash flow that can be used to support your early retirement plans.
Invest in property
Equity release can be used to invest in property, either by purchasing a second property or renovating your existing property. This can provide an additional source of income through rental income or by increasing the value of your property.
Fund your retirement lifestyle
Equity release can be used to fund your retirement lifestyle, such as travel, hobbies, or other activities. This can provide the financial freedom to enjoy your retirement without worrying about money.
If you would like to find out how much money you might be able to get you can use our free equity release calculator. No personal details are required to use it so you don’t have to worry about anybody calling you.
The pros and cons of using equity release to retire early
While equity release can be a useful tool for those looking to retire early, it’s important to carefully consider the pros and cons before making any decisions.
Access to cash: Equity release provides access to cash that can be used to fund your early retirement plans. This can be particularly beneficial if you have limited savings or other sources of income.
No monthly payments: With equity release, there are no monthly payments to make, which can be helpful if you’re on a fixed income. This can provide a regular source of income without impacting your monthly budget.
Flexibility: Equity release can be used in a variety of ways, such as to fund your retirement lifestyle, pay off debts, or invest in property. This can provide the financial freedom to support your early retirement plans.
Fixed interest rates: Equity Release Council regulated products offer fixed interest rates, which can provide certainty and stability over the term of the loan. This can be beneficial in a rising interest rate environment, as it can help to protect against potential interest rate increases.
Reduced inheritance: Equity release can reduce the amount of inheritance that you leave behind to your loved ones. This is because the loan is repaid from the proceeds of the sale of the property when you die or move into long-term care. If you’re concerned about leaving a legacy, equity release may not be the best option for you.
Cost: Equity release can be expensive, with fees and interest rates that can be higher than traditional mortgages. It’s important to carefully consider the costs associated with equity release and to explore other options before making a decision.
Potential restrictions: Equity release can come with restrictions, such as limits on the amount that can be borrowed or requirements to maintain the property in good condition. It’s important to understand these restrictions and to ensure that you’re comfortable with them before committing to an equity release plan.
Using equity release and pension annuity for early retirement
Many people who are planning for early retirement may consider using a combination of pension annuity and equity release to fund their retirement. Here’s how it works:
A pension annuity is a financial product that provides a guaranteed income for life in exchange for a lump sum payment. An annuity can be a good option for those who want to ensure a steady stream of income during their retirement years. Equity release, on the other hand, involves borrowing against the equity in your home, which is typically repaid after the homeowner’s death or the sale of the property.
Using a combination of pension annuity and equity release can provide retirees with a significant source of income to cover their living expenses. This approach can also provide the flexibility to enjoy their retirement years to the fullest without worrying about running out of money.
According to their latest report, the Equity Release Council revealed that “total lending for 2022 reached £6.2bn, a 29% increase from £4.8bn in 2021 and a new annual record for the market. It means the equity release market has doubled in size over the last five years, having seen £3.06bn of annual lending in 2017.”
According to Key Group’s Q3 2022 Market Monitor, 55% of equity release customers used the product to supplement their retirement income.
It’s important to keep in mind that equity release comes with some risks. Borrowing against the equity in your home can reduce the amount of inheritance that you leave to your heirs, and interest rates on equity release products can be high. In addition, pension annuities may not provide the same level of flexibility as other investment options.
As with any financial decision, it’s important to consider the pros and cons of using pension annuity and equity release as part of an early retirement plan and to consult with a financial adviser to determine what approach is best for your individual circumstances.