Jeff Salway: Warning over ‘safe as houses’ pensions

More than one in six people of working age plan to fund their retirement by either selling or renting a property. 'Picture: Ian Georgeson
More than one in six people of working age plan to fund their retirement by either selling or renting a property. 'Picture: Ian Georgeson
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THE PERILS of banking on property to provide a pension income have been highlighted after research found that the number of people intending to use their home to pay for their retirement has reached a five-year high.

The figure is expected to rise again when new rules take effect next year making it easier for people aged 55 and over to cash in their entire pension pot.

A survey by Barings Asset Management revealed that more than one in six people of working age plan to fund their retirement by either selling or renting a property. The total is up from 13 per cent a year ago and is the highest since 2009.

Around half of those surveyed by Barings admitted that their pension would depend on the sale of their own home. The report came as house prices in many parts of Scotland continue to climb and experts report a post-referendum surge in activity.

“Relying on property to fund retirement is extremely risky as you are not only exposed to the volatility of the property market itself, but unless you can spread the risk by buying several properties, then your retirement would depend on the success or otherwise of a single asset,” said Amanda Downie, financial planner at Carbon Financial Partners in Edinburgh.

A housing market slowdown can make it difficult to secure a sale at all, even at a reduced price. In such cases the only solution for some people might be to continue working until prices have recovered, particularly if they have yet to clear their mortgage. There’s also the question of making enough from the property sale to provide a sustainable pension income throughout retirement.

The appeal of using property as a pension, whether through a sale or via buy-to-let, has grown in recent years as annuity values have fallen and market turbulence has hit pension fund returns.

“But this year’s research indicates that more people are investing in property as a retirement source and this could mean they are too concentrated in the asset class,” said Rod Aldridge, of Barings.

“Investing for your retirement is about long-term planning and as people are living longer, more emphasis needs to be put on how a lengthier retirement will be funded.”

Many homeowners underestimate how far the eventual sale proceeds will go, said Downie, who pointed out that they then need to decide how to best use the funds.

“After estate agency and legal fees, as well as tax on any increase in the property’s value, you would need to consider whether it would be better to use the proceeds to buy a secured income for life or to simply draw down from the fund,” she explained.

A 65-year-old with a fund worth £100,000 could get a guaranteed lifetime income of around £5,700 a year, based on current level annuity rates. That would be reduced to around £3,300 a year with an annuity that rises with inflation.

With annuity values falling more people are turning to drawdown, where they can leave their fund invested and take income from it in chunks. “Using the fund to draw down from would be a riskier option, as the retiree would need to work out the growth rate required from the fund to ensure the money wouldn’t run out, before then investing to achieve that target growth rate,” said Downie.

Property is likely to become more prominent as a pension strategy when government reforms take effect next year. Those changes will allow savers to cash in their entire pension pot from the age of 55, including 25 per cent tax-free. The remainder will be taxed at the individual’s marginal rate, rather than the current 55 per cent charge.

The shake-up is expected to result in people withdrawing their entire pension fund to invest in property. But this would be ill-advised, warned Downie. “Withdrawing all the fund at once could result in more tax being payable than if it were phased over a longer timeframe,” she said. “Furthermore, withdrawing from a tax-advantaged scheme to reinvest in a taxable investment doesn’t seem sensible.”