How Pensioners Might Extract Value from Their House
If a persons pension savings are spent over 20 years, they could be spent at the rate of maybe £6,000 per year. In the UK the government also pays a pension, paid to any UK citizen. With many UK pensioners sitting in a house worth several times more than their other assets, it might be asked, is there anything they can do to spend the money locked up in their house?
Yes actually there is. Some companies offer to buy your house and let you spend the rest of your life in it. Obviously they will give you the full value of the house. They will give you at most, the net present value of the price they would be able to sell the house for at the time they expect the owner(s) to die and the house to be vacant.
Suppose your house is worth £600,000 and you and partner are expected to live 25 years or less. The rate of interest is
\[A\]. Suppose too that property values are expected to remain stable - an extremely cautious assumption. The company will give you an amount of money £
\[A\]equal to the net present value of the house in 25 years.