Alternatives to equity release to fund your retirement

You may be considering an equity release scheme to free up more money for you in retirement or to fund home improvements or a major purchase.

However, there can be various downsides to equity release, which means it may not be the best solution for everyone.

To make an informed choice about whether or not to use equity release, you need to know your alternatives.

Here, we look at other potential sources of retirement income (excluding your pensions), particularly those that may relate to your home.

Want to skip the guide and get an equity release adviser to walk you through the best options for your situation? Find the right adviser quickly below.

What is downsizing?

The most obvious alternative to equity release is to downsize, which is when you sell your current home and move into a smaller property (or one that is less expensive).

When you no longer have to work and can draw your pensions instead, you have the freedom to live potentially anywhere, so you could choose somewhere with much cheaper house prices, and pocket the difference.

Downsizing can mean you save in other ways, such as maintenance, running costs and perhaps council tax too.

Although it can’t fund your retirement completely (unless your original home is a mansion or a central London flat) it can supplement your pension income sufficiently to help you during your retirement. 

Of course, there are costs involved in moving home, and moving is also stressful.

The emotional ties to your current home and area may also be strong, so downsizing often isn’t as easy as it may sound.

Should you rent out a room in your house?

If you’re unsure whether downsizing is right for you, you could still generate an income from your house by letting out a room (or more than one).

The government’s Rent a Room Scheme allows you, as a homeowner, to earn up to £7,500 each year from letting furnished accommodation, tax-free.

Of course, there are significant responsibilities involved in renting out rooms to people, so it’s essential to do your research carefully before jumping in.

The details are important because how you share your property will affect the nature of the tenancy in terms of tenant rights and how easy it would be to end the agreement.

There are drawbacks to sharing your living space with someone else.

Perhaps the most crucial factor is your choice of tenant(s), which will ultimately come down to your judgement – and perhaps a little luck.

Can you continue earning after releasing equity?

Even after you’ve retired from your main career, you may not be ready to stop working altogether. 

There are a number of eligibility criteria for equity release, such as age (minimum 55), property value (typically at least £70,000), and other factors like property condition and location.

Now that you are not solely reliant on earned income, it may be time to put your ‘side hustle’ into action or turn some of your hobbies into money-spinners.

Regardless of whatever other marketable skills you may have, retired people, in general, have one very saleable asset: they have more flexibility.

This opens up various business opportunities ranging from dog walking and pet feeding to home tutoring, gardening, painting, decorating, and many other in-demand services.

So don’t underestimate your earning potential just because you’ve quit your nine-to-five.

Find out more about starting a business in retirement.

What is a retirement interest-only mortgage?

A retirement interest-only mortgage is quite similar to a lifetime mortgage (the most popular form of equity release) but with a key difference.

With a lifetime mortgage, there are usually no monthly repayments and interest compounds over time, so there is a larger sum to repay at the end of the mortgage term.

With a retirement interest-only mortgage, you will borrow a large lump sum and make monthly payments that pay off just the interest on the loan.

When your home is finally sold (when you die or move into long-term care), the amount repaid will be the same as the amount you borrowed.

This should leave more of the value of your home for your loved ones to inherit.

It’s relatively easy to get a retirement interest-only mortgage, as you only have to prove you can afford the monthly interest repayments.

It should also be mentioned that while these mortgages offer a potentially cheaper alternative, the borrower must prove affordability, which could be challenging for some retirees.

Should I use other savings?

It may sound obvious, but using up your other savings is often preferable, at least initially, to using other sources of money.

For example, if you have a private pension pot, any remaining funds will be passed on free of inheritance tax (IHT) when you die.

For this reason, some people spend other savings first and use up their pension last to maximise the amount they can leave to their loved ones.

One way of saving for retirement in parallel with your pension is the lifetime ISA (LISA). Most commonly used for saving for a first home, it can be helpful as a retirement savings vehicle.

You can put in up to £4,000 a year, which receives a 25% bonus from the government (up to £1,000 a year), similar to the amount added to a pension in the form of tax relief.

You can access it without a 25% penalty from the age of 60, when you buy your first home, or if you have less than 12 months to live. 

A LISA has a key advantage over a pension, which is that the money you withdraw from it doesn’t count as income, so it isn’t taxed. Pension income is taxed as ordinary income, except for the first 25%.

The disadvantage is you can only pay in up to £4,000 a year from the ages of 18 to 50. You must also make your first payment into your ISA before you’re 40.

Nevertheless, a LISA can be a valuable addition to your pension savings if you start one soon enough.

Get expert financial advice

While equity release is a popular option for funding retirement, it’s worth exploring other alternatives such as downsizing, renting out a room, or utilising additional savings.

Each option has its own set of benefits and considerations, and weighing them can help you find the best fit for your retirement needs.

Taking the time to explore all your choices will ensure a more tailored and effective approach to managing your finances in your golden years.

Unbiased will match you with a financial adviser for expert financial advice on exploring alternatives to equity release and finding the best approach to suit your retirement goals.

If you found this article helpful, you might also find our articles on equity release for under 55s and remortgaging to release equity informative, too.