British pensioners withdraw £7m of equity from their property every day

Retirees battle inflation with equity release and linked annuities – but the numbers don’t always add up

At current inflation levels, linking an annuity to the rising cost of living wouldn’t pay off until the age of 91 – older than the average life expectancy (iStock)

Pensioners withdrew £1.25bn of cash from their property in the first half of 2017, in a bid to boost their quality of life and counter the rising cost of living.

At a typical £70,000 per person released from homes worth an average of £314,000, the rates of equity release are up by a third in only six months, with those in London and the South-east accounting for more than half of all property asset withdrawals.

Equity release in the capital stands at an average of £114,000, on a typical property value of £576,000.

The cash is often funding home improvements and holidays, as well as supporting family with cash injections, according to the research from Key Retirement Solutions, using products including drawdown and lifetime mortgages.

But with almost six million people aged over-50s, dealing with debts of more than £12,000, many use the cash to pay off mortgages and other borrowing, research from Saga suggests

Although these debts have usually come from splashing out more than they anticipated, more than one in five of the over-50s have borrowed to cover the rising cost of everyday bills.

But even those trying to combat the effects of the increasing cost of bills such as food, energy and care with more expensive pension income products, rather than straying into debt, are now being warned that it may not be worth it.

Analysis from Hargreaves Lansdown has found that a 65-year-old can buy an non-increasing, secure annual income of £5,200, but would receive a £3,193 for an income that increases each year in line with inflation or £3,441, with a fixed 3 per cent yearly increase.

Though inflation linked annuities are linked to the RPI, currently at 3.5 per cent, a man currently aged 65 would need a yearly inflation rate of 4.4 per cent, and a woman would need the cost of living to go up by 4 per cent annually, for the inflation-linked option to pay off by the time they are expected to die.

How long?

At current inflation levels, linking an annuity to the rising cost of living wouldn’t pay off until the age of 91. However, average life expectancy in England is currently 83 for women and 79.4 for men.

Not only that, but experts now suggest the rate of increase in life expectancy is grinding to a halt, making it increasingly unlikely that retirees buying this kind of guaranteed income would break even on their decision by the time they die.

“Careful consideration is required when choosing your annuity options as it is something you only do once,” says Nathan Long Senior Pension Analyst at Hargreaves Lansdown.

“A level annuity gives you the highest starting amount, but with the certainty that inflation will chip away at the buying power of your income every year. This may not be a problem if you believe your income needs will continually reduce as you get older.

“Inflation-linked annuities give you less to start with, but the promise that your income will retain its spending power. The ability to finally start spending their pension, leads most people to buy a level annuity – but it is important to think carefully.”

It is possible to buy more than one annuity, allowing retirees to diversify their retirement income by opting for different types of annuity increasing at different levels. Couples planning their retirement together should be aware that women need lower rates of inflation to get a good deal on an inflation-linked annuity when compared to men.

“Fixed increases of 3 per cent look less attractive, they do not benefit from a high starting income, but still run the risk of higher levels of inflation destroying the spending power of the annuity income in the future,” Long adds.

“We continue to believe that the majority of people will be well served in retirement with a blend of annuities for secure income, and drawdown for any discretionary retirement spending.”