Why your own property might not fund your pension

publication date: Oct 10, 2014
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

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How are you going to fund your retirement?

Barings’ Head of UK Wholesale Distribution, Rod Aldridge, announced in recent weeks that the number of people who are relying exclusively on their property to fund their retirement is on the increase. He added that people planning to use a ‘volatile asset’ such as their own home or other properties should fully appreciate and understand the level of risk involved, and should attempt to diversify their investments through a range of assets, and not just property alone.

Barings’ annual survey suggests that 7% of non-retired people (2% more than in 2013), that’s 2.5 million, intend to sell their primary residence, and in total 16% of people, nearly 6 million people, intend to sell or rent property to fund their retirement.

These figures rise for the West Midlands population, where 6% plan to sell primary residences and 21% plan to sell or rent secondary properties, whereas in Wales the figures are 5% for both.

Read - Will your property deliver a retirement income?


Prices aren’t increasing as fast as we are being led to believe!

Meanwhile the latest data from the Land Registry and other reports shows that property prices in England and Wales are now at an average of £178,000, an increase of 8% year on year, but in reality, prices are still in recovery as they’re 3% lower than six years ago.

Read - Will your property deliver a retirement income?


Prices in many areas are the same as they were 10 years ago! 

The East Midlands and Lincoln statistics are pretty similar. Prices peaked at around £146,000 in 2007/8, fell to £120,000 in 2009 and are now up to nearly £130,000. Although this is an increase of 6% year on year, prices still have to increase by another 11% to recover – if they ever do – to their previous heights, and Lincolnshire prices are actually much the same today as they were ten years ago.

Read - Will your property deliver a retirement income?


If you own outright, your property value needs to grow in line with inflation for pension purposes

When you own your property outright and are hoping it will fund your retirement too, you have to remember that when we quote house prices, we quote the ‘actual’ figures (called ‘nominal’). This doesn’t take into account that the cost of living rises every year (‘inflation’). As a result, you need prices to rise in line with inflation so that you can afford the same goods and services in the future as you can now.

This really isn’t happening in the property market at the moment. If you own a property worth, say, £130,000, this price needs to increase by at least the level of inflation (cost of living), which on average is 3% each year. And if I owned a property outright in Lincoln worth £146,000 at the height of the market, six years later my property price would need to be £146,000 x 3% inflation annually for the last six years: in other words, £175,000. Currently prices are, on average, £130,000 so that I have £45,000 less than I need to maintain my investment.

Read - Will your property deliver a retirement income?


Cashing in your pension for property could be a disaster from an income perspective 

Given the recent news from the Conservative Party Conference that people can now withdraw their pensions and invest in other assets, property is being hailed as a great investment that will give good returns when you retire.

This is a dangerous premise, though, because although property can deliver good returns, you need to create capital growth when you buy, for example through self-build, or by buying a complete wreck for cash and making it mortgageable.

Relying on ‘natural house price growth’ of your own property to deliver a pension is in fact a huge risk, and needs careful research and advice. As an example, from 1995 onwards, Lincolnshire prices beat 3% annual inflation and grew at 4.5% per year. However, since the start of 2004, ten years ago, prices have hardly increased at all, so in real terms they have actually fallen.

Consequently, for anyone who considers that their property is their pension pot, it’s not necessarily the retirement money-spinner it once was; you must also consider the worst happening, where there is no capital (or rental, if relevant) growth at all.

Read - Will your property deliver a retirement income?


Get the RIGHT advice, don’t invest in property investment deals that just ‘say what you want to hear’! 

The reality is that to ensure you have sufficient retirement income, you must seek advice from a regulated and trained independent financial advisor (IFA). If you attempt to plan your retirement income alone, you are risking harsh financial shocks at a time when you hope to be comfortably enjoying your retirement. Your first meeting with an IFA should be free of charge, and money spent now on a professional and realistic assessment of your current financial position, providing you follow their recommendations, should give you security and peace of mind about your retirement incom

For more information on investing in a property versus a pension, visit Property Checklists - Pros and Cons of Investing in property for a pension

Also, see Barings

Read - Will your property deliver a retirement income?

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