Is Property A Dangerous Retirement Investment?

“Property is a better bet than a pension.” Back in 2016, the former Chief Economist at the Bank of England (BoE) Andy Haldane, caused some controversy by suggesting that individuals should do away with traditional pension investments, and invest in property instead. But is this a viable solution?

Andrew Megson, executive chairman of My Pension Expert, explores the risks of property as a retirement investment.

There is no easy answer to this question. Especially in the current economy, as inflation has continued to climb up to record levels whilst interest rates remain low, there is a clear case to be made for entering the property market. Add into the equation the fact that house prices have rebounded at pace since the first lockdown – allowing buy-to-let properties in the UK to prosper and increase in value by 5.8% year-on-year – property may constitute a sound investment for some. 

 Clearly, this may provide some impressive returns in retirement. However, it is important to note the various risks that inevitably come when individuals replace a traditional pension with a property portfolio, as Haldane’s suggestion may be reckless for some. With this in mind, what should pension planners consider before taking the leap?

Hidden costs can be more than retirees bargain for

 Firstly, it is important to acknowledge that property can be a sound investment for some, offering the prospect for long-term capital growth. That said, it is equally important to note that house prices don’t always reliably head upwards.  

 In times of economic hardship, like a recession, the market typically slows and causes properties to fall in value. The result of this is that individuals are likely to see their property lose capital. Likewise, in this scenario negative equity becomes a possibility; this tends to happen when individuals have paid more money for the property than it is worth. It goes without saying that this sort of volatility is rarely an issue for those who have a more traditional pension pot. Even throughout the COVID-19 crisis, many individuals have still been able to enjoy positive pension growth this year.

 Other important factors that those considering this option should mull over, are the ongoing costs associated with running a property, as these can accumulate, chipping away at retirement funds. Costs can be varied – from landlord’s insurance, maintenance fees for wear and tear, property management, letting fees, or simply even furnishing the property. Letting fees alone are usually somewhere in the region of 15%, and this is before retirees have factored in any void periods where the property is vacant, which is likely to happen from time to time. Together, these costs can amass, leaving prospective retirees financially vulnerable, if they have no plan B. 

Considering tax and liquidity risk 

Tax burdens can pose further issues. It goes without saying that buy-to-let property owners will normally end up footing a higher tax bill than before, due to legal, stamp duty, and survey fees, as well as several taxation changes affecting landlords and those who own a second (or several) property. For example, there is a 3% stamp duty surcharge for second homes, as well as an increased capital gains tax. These costs can be very steep, making the cost of buying and owning an investment property an extremely expensive business. Put simply, this can lead to diminished returns in retirement. 

Furthermore, individuals should also consider liquidity risk  – that is, how easy (or difficult) it is for an individual to reclaim their funds when they need them. Often, selling a property can take several months, and sometimes even longer, which means that any people who are relying on the sale proceeds to fund their retirement will need to plan way ahead, and have a contingency plan in mind, on the off chance that the sale falls through, or the markets crash.

Evidently, using a property portfolio to fund a retirement is a very involved process, and can be extremely costly. As such, those seriously considering this as an option must carefully weigh up all these considerations to ensure that committing to property investment is viable and profitable enough to see them through retirement.  

The importance of financial advice

Just like any investment, the property investment process carries risk. For this reason, individuals would do well to seek independent financial advice before making any big commitments – particularly because taking out a significant amount of cash from their pension pot to fund a property can entail serious implications and tax penalties. 

After reviewing all the relevant information, some individuals may decide that doing away with a traditional pension entirely is too risky. In this eventuality, an independent financial adviser (IFA) will be able to suggest a more suitable investment strategy. Certainly, unlike property investment, retirees are likely to experience more tax relief from a pension pot, as these investments are sheltered from the likes of capital gains tax and stamp duty.

Ultimately, owning a property as part of a wider investment portfolio can be a very prudent option, allowing individuals to make some notable returns. That said, prospective retirees should not put all their eggs in one basket and discount traditional pensions altogether. In many ways, factoring in a more traditional pension may offer more security and tax-efficiency in the long-term. 

About the author: Andrew Megson is the Executive Chairman of  My Pension Expert, the UK’s number one Advised Retirement Income Specialist. Founded in 2010, My Pension Expert specialises in providing independent advice to UK consumers about their pension plans – it arranges millions of pounds worth of retirement income options each week.  

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