Renting out a room to supplement your pension
Growing numbers of people face the prospect of having to delay retirement due to inadequate savings, but if you’ve got a spare room sitting empty, you might be able to use it to supplement your pension.
The number of people not on track for even a minimum retirement lifestyle has increased from 35% to 38%, according to Scottish Widows’ latest retirement report, meaning many will need to explore alternative ways of boosting their incomes when they stop working, or work for longer.
Most people would like to retire at the age of 62, the report found, but 54% think they will have to work longer than they would like, on average by seven years, if they’re going to be able to afford to retire.
Here, we explain how renting out a spare room could help increase your income in retirement, as well as some of the things you need to watch out for if you’re considering taking this route.
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Why rent out a room?
There can be significant tax advantages to renting out a spare room. For example, under the government’s Rent a Room scheme, you can rent a furnished room of your home to a lodger, and the first £7,500 of rent each year will be entirely tax-free.
Recent years have seen a huge rise in homeowners taking in lodgers, according to flatshare site Flatshare.co.uk. Comparing January 2024 with January 2021 there has been an 89% increase in new people taking in lodgers. Matt Hutchinson, SpareRoom spokesperson said: “You’d have to work a lot of hours in a second job to come close to the income you can earn from a lodger.
“The good news is, all these extra rooms are really helping add to supply in the rental market, which has been in decline for several years. If government wants to help both homeowners and struggling renters, they should seriously consider increasing the tax threshold for the Rent a Room Scheme, an incentive specifically designed to encourage people to rent out their spare rooms.”
Things to consider
There’s no escaping the fact that letting out a room, especially if it’s to a stranger, comes with substantial risks, not least that you might end up hating each other. If you can, it’s worth taking in a lodger who’s been recommended by someone you know. If this isn’t possible, make sure you vet them very carefully before letting them into your home. This should involve requesting references from previous landlords and carrying out credit searches. It’s worth drawing up a formal agreement too, so that you are clear on exactly where you both stand in case there are any disagreements along the way.
From a financial perspective, it’s worth noting that if the rent you receive exceeds the £7,500 Rent a Room allowance, you’ll need to declare it on a tax return. Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “Any more than this, and you need to register for self-assessment. Rents have gone through the roof recently, so there’s a chance you put the rent up over this threshold without considering the implications.”
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Remember too that if you’re currently claiming benefits, these could be affected once you start renting out a room, so you’ll need to check how much they are likely to be reduced by before you commit.
If you are planning on renting out your spare room, you must also notify your home insurer. A spokesman for Defaqto said: “Generally, insurers are happy for homeowners to rent out a room. Even so, this will usually impact on the cover included in a standard home insurance policy, particularly with regards to theft and vandalism. If you do not tell your insurer that you have a lodger and your home is broken into, it could invalidate your cover altogether. It is worth checking with your insurer and making sure you have sufficient cover in place before renting out any area of your home.