Is property the new pension?
Sarah Modlock – MSN Money
April 27 2007

At a time when our population is ageing and the vandalism of our pension system by Gordon Brown is painfully apparent, it is not surprising that more of us are looking at our property as an asset which will secure our financial comfort in retirement.

But is it that simple?

A staggering 12.9 million people expect to use their property to fund at least part of their retirement and 1.8 million will rely on it to make up more than half of their retirement income, according to a report by the Prudential and research company Datamonitor.

Property now key to retirement planning

What’s more, property is now seen by many as more important than savings and investments when it comes to retirement planning.

The UK's current retirement gap is compounded by a poor understanding of pensions. More than a third of people think that between £12,000 and £20,000 per year is sufficient to live comfortably in retirement.

However, at current annuity rates, to purchase an annuity to give an annual income of £17,000 requires a pension pot of roughly £250,000, or nearer £350,000 if you want to ensure it rises in line with inflation. This is in dramatic contrast to the actual average personal pension pot of just £25,000.

Baby boomers sitting on a property goldmine

Existing levels of equity in property could certainly help. The assets of the baby boom population (currently aged between 50-60), could prove instrumental in alleviating the pensions crisis in the medium term.

The current baby boom generation holds £542.6 billion of equity in their property. Datamonitor estimates that by the time they all reach retirement age (2020), this will have risen to £1,425.4 billion.

Those in the 45-55 age group are most dependent on property to provide them with a sizeable proportion of their post-retirement income. This group, representing the younger wave of the baby boomers, already holds a great deal of wealth in property and has benefited more than most from home value rises. These 45-55 year olds who bought their homes in 1985 have seen their property price increase by a staggering 358%, according to Datamonitor figures.

"It may be too late for people approaching retirement to build up a supplementary source of income using a pension, savings or investments,' says the Pru's Ali Crossley. "However, the equity tied up in their homes could be instrumental in boosting their funds."

She goes on to warn that it is never too late to start retirement planning: "We would urge anyone concerned about their retirement provision to seek financial advice.”

Downsize to unlock your money

So how do you access the equity? Downsizing is the most popular way to release equity from property. This is followed by lifetime mortgage or equity release schemes. Equity release may be more suitable than downsizing for the 74% of people who said they were very attached to their home and would only leave their property if they had to.

Downsizing involves selling the family home and moving to a smaller property, keeping the balance to buy an annuity, an investment portfolio or both. This kills off your need for a mortgage and also spares you the need to pay capital gains tax on any profit, as the family home is your main residence.

But there is a risk. Your home may not sell when you want or for as much as you expect or need. There is also a concern that as millions give up their large family homes, smaller properties will be more in demand and potentially more expensive, defeating the object of trading down.

Should you opt for equity release?

Equity release schemes allow you to sell part of your property whilst you still live in it. When you eventually sell the house or shuffle off this mortal coil, a percentage of the profits from your property goes to the scheme.

To be eligible for most schemes, you must be aged 55-70, have a property that is worth at least £30-40,000, and, ideally, be a freeholder.

But consider whether you may want to move, whether the scheme will pay out enough after the age of 70, the needs of a surviving partner and expectations of family.

Age Concern recommends that you get independent legal and financial advice and offers a fact sheet 'Raising income or capital from your home' free of charge from its Info Line 0800 00 99 66 open 7am-7pm, seven days a week.

The buy-to-let approach

Investing in buy-to-let property also has potential pitfalls. In theory, you own the property, the rent paid by your tenant covers the mortgage and you sell at a later date for a tidy profit as the property value has increased.

But nothing is guaranteed, including constant, reliable tenants and a rising property market. It may be a safer bet if you can afford to buy without a mortgage but don't forget 'hidden' costs such as the capital gains tax due on any profit over £8,800 (2006/2007) at your highest rate of income tax when you sell the property.

Despite this, the number of buy-to-let home owners may double in the next three years, according to market research organisation Mintel.

It says that three per cent of homeowners are thinking of buying another property to let to tenants by 2010, doubling the current number of the UK's private landlords to about two million.

Mintel's survey reveals that 68% of people with second homes believe their properties are better investments than pensions. "Property owners are increasingly seeing the benefits of investing in bricks and mortar and often regard the second homes market as a good alternative means of saving for retirement," said Paul Davies of Mintel.

Spread the risk

The key, as with all forms of investment, is to spread your risk.

So if you think your retirement income is, literally, as safe as houses, it could pay to look carefully at the risks of relying solely on property in your retirement.

Experts recommend that property forms part of a mixed investment portfolio along with cash and equities, so that the risks are spread.

All you have to do then is find the perfect pair of slippers…

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