Over the last few years, the financial advice industry has been swamped by surveys and studies that property is becoming a key part of clients’ retirement plans.
This could be via equity release products or downsizing.
Recent research by Legal & General Home Finance found that 22% of British workers intend to use the value of their home to fund their retirement.
With house prices soaring, the average homeowner could access around £73,000 ($99,295, €87,511), which would greatly improve the retirement of 70% of over-65s who depend on their state pension but who also own a home, which may have home additions.
So, International Adviser spoke with Canada Life and AJ Bell about whether using property to fund retirement is a smart move.
Understandable
Laura Suter, personal finance analyst at AJ Bell, said: “Property prices have risen dramatically in the past year. The average UK house price is now £271,000, having risen more than 10% in the past year.
“This means that many retirees might be cash or pension poor but property rich, and is understandably leading some to think about releasing the equity in their home to bolster their pension income.”
Andrew Tully, technical director at Canada Life, added: “People often refer to their property as their pension and in most cases, it will also be their largest asset. However, this is a very ‘all or nothing’ approach to retirement planning with a very large exposure to property.
“Adopting a diversified approach to investments is usually the recommended option and avoids the risk of having all your eggs in one basket.
“Concentrating solely on property also risks missing out on some of the benefits of pension saving. Auto-enrolment for example has been instrumental in getting more people saving and benefitting from valuable employer contributions and tax relief. As well as any additional matching contributions which some employers offer above the minimum levels.
“Alongside this, many younger people are buying property later, if at all. While three-quarters of over 65s in England own their home outright, people in their 30s and 40s are three times more likely to rent than 20 years ago. This suggests many may be either renting or still paying a mortgage as they approach or reach retirement, so there may not be sufficient remaining to also fund retirement.”
Downsizing
If Brits do look towards property to fund or partially fund retirement, then one way is downsizing.
Suter said: “Downsizing is one route, as often retirees will still live in the family home and be able to move to a smaller property.
“However, there are lots of factors to consider. First, while the value of the home you’re selling has risen, so too has the value of the property you want to buy. This means you might not be able to release as much money from your property as you’d expect.
“You also need to think about the type of property you’re willing to live in. Lots of people like the theory of downsizing, but when confronted with moving to a smaller home, with less space or a smaller garden, for example, they realise that it’s not for them.”
Tully added: “For people considering using their own property to fund their retirement by downsizing, they should remember that moving house is an expensive business and people are often shocked by how little money is left once they’ve paid for their new house as well as the fees and taxes associated with moving.”
Equity release
One of the fastest growing sectors in the financial advice world is equity release.
In 2021, total lending via equity release came in at £4.8bn, including £4.3bn via new plans and £500m to returning customers. This represents a 24% rise from £3.86bn in 2020, at a time when wider lending across the mortgage market grew 31%.
Also, firms have also seen how much equity release is impacting the sector, as Royal London recently bought a 30% stake in later life lending and product specialists Responsible Life and Responsible Lending (Responsible Group) to be able to participate in the later life solutions market.
Suter said: “The market has changed a lot in recent years and improved for homeowners. However, people need to be aware of the pitfalls of releasing capital. With far higher average interest rates than the normal mortgage market it’s not a particularly cheap option and the interest costs can quickly mount up due to the effect of compounding and because the contract runs for the rest of your life.
“The big impact is on inheritance planning, as releasing equity and the subsequent interest costs can take a big chunk out of any inheritance you plan to leave. This is fine for those with no dependents or who need access to the money now, but if you’re planning to leave your home as part of your inheritance you should discuss the pros and cons of equity release with your children before doing it.
“If you do go down the equity release route you need to be sure you’re getting the plan that works best for you and getting the best value possible, as there are lots of options that can make a big financial difference – such as whether you pay interest as you go, whether the plan can go into negative equity and whether you’re eligible for an ill-health plan.
“This means financial advice is a must to avoid signing a contract that will cost you dearly that you’ll be stuck with for life.”
Buy-to-let
Joshua Gerstler, financial adviser at the Orchard Practice, added: “Buy-to-let properties are another way that some of our clients plan for their retirement. It is hoped that a rental property will provide a regular income, as well as increase in value over time.
“Like most investments, there are no guarantees, and you could have a tenant who does not pay the rent or expensive repair bills to pay.
“Most of our clients who have rental properties, will have them as part of a diversified portfolio which also includes other investments such as stocks and shares Isas and pensions.”
