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Retirement planning: Using property to generate an income

It’s often said that Brits have an obsession with property. Figures from the Office of National Statistics (ONS) suggest it’s true, with almost half of us believing using bricks and mortar to fund retirement will generate the most money. It’s a growing trend that indicates our love affair with property isn’t going anywhere.

When asked what the best way to save for retirement is, 49% replied property will increase in value the most. This compared to the 40% that believe Workplace Pension schemes would lead to the greatest value increase, despite 85% of eligible employees contributing to one. However, employer pensions were deemed the safest way to save for retirement.

The number of Brits banking on their property to fund their retirement aspirations is on the rise too. Eight years ago, when the question was first asked by ONS, 40% considered property the most effective way to grow their retirement savings in terms of returns. Perhaps unsurprisingly, given low-interest rates, the popularity of using Individual Savings Account (ISA) or a Savings Account to save for retirement has decreased during this time.

Why is property attractive for retirement?

When you take a look at property prices, it’s clear why those planning their retirement are keen to take advantage of the property market.

Figures from the Land Registry show 30 years ago the average house price in the UK was £52,238. Fast forward three decades to September 2018 and the average stands at £232,554. With growth of 345%, property can generate a return that’s unmatched by saving accounts, investments and even pensions, making it a lucrative option. However, property experienced phenomenal growth during the 90s and early 00s, whether the previous level of return can be achieved again is up for debate.

Another reason property is an attractive retirement fund for some is that it’s often deemed less risky than other investments. In fact, 30% said it was the safest way to save for retirement in the ONS survey. With this in mind, is property a good way to build a retirement income?

Investing in Buy to Let

Investing in Buy to Let property is another option when building retirement wealth. It was a market that was seen as a way to create a stable, profitable return in the past. However, regulatory changes mean it’s not as attractive as it once was.

The Buy to Let market is now more heavily taxed, for example, Stamp Duty for Buy to Let properties is set at 3% above the standard rate. There are other issues to consider when thinking about using Buy to Let to fund retirement too, including the cost of maintenance, budgeting for void periods and rising interest rates on mortgages. Despite this, Buy to Let can still be used to effectively fund retirement in some cases.

Property that you’re living in

For most who are planning to use property to fund retirement, it will be through the home they’re living in. Thanks to high property prices, it’s very likely that your home is one of the largest assets you own, which could potentially fund your later years.

Firstly, paying off your mortgage has an obvious benefit when in retirement; it will reduce your outgoings. You won’t have to worry about your income covering mortgage or rent payments once you own your home outright.

However, for it to fund retirement beyond this, there is an issue; much of your wealth will be locked away. Traditionally, retirees have downsized to access property wealth. But the ONS figures reveal it’s a step few want to take. Whether due to emotional attachment, the cost of moving, or another reason, just 23% of adults expect to downsize to generate retirement income.

Equity Release

Another option here is Equity Release. This is the term used for a range of products that let you sell some of the equity in your home while retaining the right to live in it. The loan is repaid when you move into long-term care or die. You can receive payment as either a lump sum or over several, smaller amounts. If you want to boost your retirement income by using your property without moving, Equity Release might well be the right option for you.

Furthermore, the Equity Release market is going through a bit of a revolution. The Equity Release Council have stated that: “The growth in Equity Release has been driven by innovation across the later life lending market, as the number of product options available has more than doubled in two years.” And the figures speak for themselves:

  • Product options are up to 139 in August 2018, from just 58 in In fact, back in 2007, just 24 Equity Release products existed
  • A total of 38,912 households aged 55 and over, used Equity Release products from Council members during the first half of 2018
  • For every £1 of savings withdrawn via flexible pension payments in the last 12 months, 50p of housing wealth was unlocked via Equity Release, up from 40p the previous year

Remember, it will impact your legacy. Relinquishing part of your home before you pass away will impact on the wealth you leave behind for loved ones. There are products that allow you to ringfence a portion of the property to pass on in the form of an inheritance. Of course, this would limit the amount of wealth you can access. That said, it’s likely your children will own property of their own by the time you pass away, or may not need or want to receive an inheritance. It’s always worth discussing this with them openly, as they may prefer to see you benefit from the wealth you’ve accumulated over time.

As with all retirement planning, whether you should use property to fund your lifestyle depends on your personal circumstances. If you’re using property, it should be part of a wider, risk aligned portfolio that’s been put together with your aspirations in mind. Seeking the support of a financial planner can help you assess if property is the right retirement provision for you to invest in.

If you’d like to understand what your retirement options are, or discuss the possibility of Equity Release being the right option for you, please get in touch with one of our expert financial planners.

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