Why your property is not your pension
As a Chartered Financial Planner, I hear a lot of different things about plans for retirement from the clients we work with. Some of these are perfectly rational and make real sense. Others border on the weird and wacky.
The two retirement planning claims that tend to cause most concern are “my property is my pension” and “I don’t need a retirement plan because I plan to just keep working”. In many cases both are just plain wrong, or at least misguided.
The scale of the problem
It is generally accepted that we have a problem with pensions in this country. We are all living for longer (on average) so the cost of funding a longer retirement is getting more expensive. The typical solution to this conundrum is to save more for retirement and retire later.
Indeed, the State pension age is already due to increase from 65 to 68, and more recent proposals suggest that age 70 might be a more realistic retirement age for State benefits within a few generations.
One way people seem to deal with this pension problem is to plan to fall back on the value of their home. New research from Barings found almost three million working Brits, about 8% of the population, are relying on their property to fund their retirement. This is not the number of people who think their humble abode will supplement their income in retirement, but the number who will rely on their property alone.
I fear that many of these people are in for a very rude awakening when they get older. In the past year alone we have seen £29 billion wiped off the value of the property owned by these ‘property pension’ owners. Residential property can deliver good long term results but it can equally be a very volatile investment over the short term.
The problems with property
Property as a retirement plan comes with two main types of problem – the investment problem and the practical problem.
From an investment perspective, property is a single asset class. This means that you are putting all of your hopes for a retirement income into the hands of one investment type, which can fall as well as rise in value. More specifically than that, you are often investing in a single property, which increases the investment risk further still.
If you go beyond simply considering your home as your retirement plan, and become a ‘landlord’ investing in a number of properties, you spread the risk a little more but also often introduce the risks associated with borrowing money to invest.
On a practical front, you need somewhere to live in your retirement. The money you can release when you downsize to a smaller property can be invested to generate the income you need, but after the cost of the property transactions you might find the income is nowhere near as much as you thought it would be.
It’s not all bad
The very best retirement plans we see typically include a good mix of pension and non-pension assets. Property can play a role in retirement planning, but it should not be the only ‘investment’ in your retirement portfolio.
If you are able to create a diversified retirement portfolio which includes a pension plan, an Individual Savings Account (ISA) portfolio, cash, property, business assets and other investments, you are more likely to have the retirement income you need when you eventually stop work.
Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice.
