Almost a fifth of those who use property to generate income do so for their retirement. But is this a good strategy?
For many of us, our houses are our most valuable asset and we may plan to use them to fund our retirement. But is this a good strategy? Here are some of the pros and cons.
The pros of property as pension
- It may have earned more than you have
Over the past two decades, many UK properties have outearned their owners. According to the latest Land Registry figures, the semi-detached house in London bought in 1995 for the average price of £97,000 would have been be worth nearly £580,000 in September 2019, an average rise of £20,100pa2.
- You may want to downsize
Many people want a smaller home as they get older. This also gives you the chance to release a tax-free sum of money for retirement because there is no capital gains tax to pay when you sell your main residence.
- You can stay put
If you don’t want to leave your home, equity-release schemes can allow you to release capital but still live in your property, and in some cases can be structured so you can still leave an inheritance to your family.
The cons of property as pension
- You lose out on tax advantages
Saving into a pension lets you claim back tax you have paid on income, an option not available with your property. And you can take a 25pc lump sum tax-free from your pension. Relying on your home means you don’t get the benefits of either proposition.
- Calculate the true cost of moving
Equity release is more expensive than a mortgage. And even though lifetime mortgage rates are coming down, this is still a relatively expensive form of finance.
- Buy-to-let advantages are declining
New government rules on stamp duty and tax relief on mortgage interest make this less viable.
A hybrid approach is likely to be most efficient. A qualified financial adviser will be able to speak to you about which assets to use first to fund retirement efficiently.
Equity release will reduce the value of your estate and can affect your eligibility for means-tested benefits.
Tax treatment varies according to individual circumstances and is subject to change.