What role does property play in retirement planning?
Analysis: The British population’s fixation on property ownership is one of our enduring national characteristics. But as property wealth grows, and pensions and investment income continues to falter, is home ownership becoming more intertwined with retirement saving?
Many see property as increasingly important to planning for retirement, research released this week shows. Six out of 10 over-55s estimated their homes to be worth more than retirement funds in a report by high net worth adviser Bower Private Clients.
Of those surveyed, 11 per cent said they would use the wealth tied up in their private properties to fund their retirement before turning to a pension fund for income, while 25 per cent responded positively to the prospect of borrowing against the value of their home.
It’s hard to see any solution to the retirement income challenges that we currently face which don’t involve significant use of the accumulation of wealth in people’s properties
Similarly, in its report ‘Redefining Retirement’, Old Mutual Wealth found the main reason people would consider releasing value from property in retirement was to provide an income, with 34 per cent citing the need to pay for long-term care as a driver of this.
Malcolm McLean, senior consultant at Barnett Waddingham, said it was inevitable that people would have more money in property than their pensions, given the growth of property values compared to that of the stock market.
He said that when it comes to people sustaining themselves in later life, “more and more property will take precedence here”.
Safe as houses?
The UK savings ratio is far lower than its European peers and forecast to reach 3.8 per cent, the lowest level in 50 years. Savers typically prefer to invest savings in tangible assets such as property, a tendency reinforced by wide mistrust of the financial services industry.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “There’s an awful lot of housing wealth tied up in the older generations.”
He added that many of them do not have adequate traditional retirement savings.
Property has auxiliary benefits. Andrew Cheseldine, partner at consultancy LCP, said “having a property that’s worth £300,000 or half a million that you can live in when you get to retirement is in some ways more valuable than having £300,000 or £500,000 in disposable cash” because interest on cash is taxed. In comparison, someone living in their own property has relatively few expenses.
“Not having to spend money on rent is very valuable,” Cheseldine said. However, he added: “The UK focus on investing in property is perhaps overly done at the moment and has been for quite a few years; we could do better with broadening our investment mix.”
Not without risks
Savers who regard their own property portfolio as a pension also take on a number of risks. When the time comes to release equity, Cheseldine said downsizing “might make sense”, but it is difficult to spread the subsequent investment into a pension – unless a saver downsizes two to three years prior to retirement and puts the money into their pension gradually.
McLean said: “It’s not a panacea by any stretch of the imagination, particularly if you’re planning to downsize and you can’t sell the house, or you can’t get what you expect out of it and you still have a mortgage outstanding – all sorts of problems come up.”
McLean also expressed caution towards equity release plans, which “sound a lot better than they actually are”, stressing that the interest to pay on an equity release plan can be as high as 6 per cent to 7 per cent, which then has a knock-on impact on what the next generation can expect to inherit.
“I suspect a lot of people are looking at [releasing equity from property] now and will continue to look to do so if they’ve gone down the road of property investment and not built up a pension plan at the same time,” he said.
Meanwhile buy-to-let, at one point regarded as a fail-safe investment, is facing increased stamp duty and flat rate tax relief on mortgage interest. “That’s got to do something to the value of [buy-to-let] as an investment in the longer term,” said Cheseldine.
Will the rise of property continue?
It is uncertain whether under the Lifetime Isa the next generation will spend their savings on a house and leave nothing for conventional retirement income.
McLean said property and pensions would “be better kept separate, quite frankly, certainly in the accumulation stage” adding: “The reality is that most people can’t do both.”
McPhail said: “It’s hard to see any solution to the retirement income challenges that we currently face which don’t involve significant use of the accumulation of wealth in people’s properties.”
But he added: “As a retirement savings strategy now for the 20, 30, 40-year-olds, I think it’s much more about pensions or Lifetime Isas than it is about using property.”