Financial Considerations for Retirement Properties

Forward financial planning is key to a happy and self-sufficient retirement. In fact, research suggests that the decisions you make before you retire can have a profound effect on both your financial wellbeing during retirement, as well as on the quality of your lifestyle.

Financial Considerations for Retirement Properties - The Low Down

Property trends indicate that an increasing number of people are choosing custom-built retirement properties when they retire. It makes perfect sense, therefore, that the choices regarding the type of retirement property you would prefer to live in when you retire should be made well in advance of your proposed retirement date.

Downsizing Your Property - a Lifestyle Choice

For many people who are retiring, moving to a smaller retirement-style property is an obvious consideration for both financial and practical reasons.

Main Financial Benefits of Downsizing

Financial gains from downsizing can be made in two main areas:

• releasing equity as a result of the difference in price between the existing property being sold and the new property being bought;
• reducing living costs - lower council tax, heating costs, home insurance, maintenance costs, etc.

Best Use of Funds Released by Downsizing

People approaching retirement age, particularly those who gained a foot on the housing ladder during the 1960s and 1970s, are likely to have seen a huge rise in the value of their property since then. For instance, a house purchased for £10,000 in the early 1970s might, nowadays, easily be worth in excess of £300,000, so downsizing could quite possibly release a six-figure sum to help fund retirement.

The big dilemma facing retirees with a lump sum to invest is whether to choose an annuity or some other form of investment.

Annuities & Retirement

Conceptually, an annuity is very simple; you pay a lump sum to a financial institution and in return they pay you a regular guaranteed income until you die.

However, in practice, annuities can vary considerably and offer a variety of benefits. So, thorough research should be carried out in order to find the best annuity for your individual circumstances.

Types of Annuity

• Level or Increasing Income Annuity: The value of income paid out by an annuity is either fixed (a level annuity) or increases, either by a fixed percentage annually or by the rate of inflation (an increasing annuity). Initially, a level annuity will pay out around 40 percent more than an increasing annuity but, over time, the effects of inflation will reduce the value in real terms. Eventually, depending on how long the beneficiary lives, the increasing annuity would pay out a higher level of income.
• Guaranteed Minimum Term Annuity: For most people it makes sense to buy an annuity with a guaranteed minimum term. If you were to die soon after purchasing an annuity, you would probably be unhappy (and your heirs would definitely be unhappy) that you had not received sufficient returns from the annuity. Many financial providers offer annuities for a guaranteed period, often ten years, which offer levels of income similar to those without minimum term stipulations.
• Joint Life Annuity: As well as individual annuities, joint life annuities are also available. These annuities for couples pay out lower rates of income, on the basis that, overall, the financial institution will have to pay income for a longer period than for an individual.
• Enhanced or Impaired Life Annuity: Some companies offer higher income annuities for those with perceived low life expectancy. Factors that may be taken into account include smoking, obesity and high blood pressure as well as serious illnesses such as heart disease, stroke, cancer and kidney ailments.

Other Lump Sum Investment Options & Retirement

• Savings Accounts: Bank and Building Society savings accounts are generally the safest places to invest your money but the rates of return offered may not always keep up with inflation. Nevertheless, older investors are wise to keep a portion of their assets in cash so that it is easily accessible should their circumstances change.
• Bonds: Fixed rate bonds issued by the government (‘gilts’) or companies (corporate bonds) are an alternative low risk investment option for people of retirement age.
• Shares: Shares are the riskiest form of investment because their values can go up and down rapidly. They have generally proved to be good long-term investments over the years. However, financial advisers usually discourage retirees from holding too much of their investment portfolio in shares because of the risks and uncertainties involved.

Retirement Property Budgeting - Additional Financial Considerations

Most purpose-built retirement homes and retirement villages offer extra facilities such as call alarms, warden service, common rooms and communal gardens, not normally found in mainstream properties.

However, as these extra features cost money to administer and maintain, retirement properties almost always attract annual service charges to pay for them. In addition most retirement properties, particularly flats, are leasehold, so both annual service charges and leasing costs need to be included in financial calculations regarding the costs involved with living in retirement properties.

Retirement Property Restrictions

As well as annual costs, regulations regarding ownership, occupancy and resale may well be laid down in lease conditions associated with retirement properties. For example, occupation of many retirement properties is restricted to those over the age of 55 (or over 60).

Retirement Properties for Sale

In some retirement property developments, rules are laid down that all resale of properties must be handled by the incumbent property management company. These types of restrictions can have an adverse effect on the resale value of the retirement property or result in excessive costs associated with the sale. As with any property transaction, obtaining appropriate professional advice is essential before proceeding.

Retirement Property Mortgages

If you don’t have sufficient equity to purchase a retirement property outright, all is not lost. A number of financial institutions offer mortgages on retirement properties.

The most common option for older people is a lifetime mortgage where the mortgage interest is added to the value of the loan and the mortgage loan is not repaid until the property owner dies and the property is sold. Alternatively, for those with adequate income levels, interest-only mortgages are available to purchase retirement property, with the loan being repaid when the property is sold.

For further useful information on retirement properties please read our articles below:

Choosing a Retirement Property

What is Extra Care Housing?