5 things to consider if property is part of your retirement plan

Figures suggest that many people are planning for property to play at least some role in their retirement income. With property prices and rental yields rising, it’s easy to see why you may think that property can offer security throughout retirement. However, there are some things to consider first.

Research from the Office for National Statistics (ONS) conducted between April 2018 and March 2020 unsurprisingly found that property as a retirement plan was most attractive to those that are self-employed. Currently excluded from auto-enrolment, 38% of self-employed workers said the safest way to save for retirement was property. This compares to 19% that said a Personal Pension.

Those that are employed and likely to benefit from a Workplace Pension also viewed property as a retirement plan. Some 23% of employees agreed property was the safest way to save for retirement.

While property can be a useful tool for funding retirement, it’s not the right choice for everyone and it’s important you understand how it’d work and the potential drawbacks.

These five questions are a useful starting point.

1. How will you use property to create a retirement income?

Rising property prices look like an attractive way to invest money for your retirement. But how do you intend to access that wealth? There’s more than one way to consider.

  • Downsizing: If you’ve invested in your own home, you may choose to move to a cheaper property to release the money invested in your property.
  • Borrowing against your home: If money is tied up in your home and you don’t want to move, you may choose to secure loans against the property.
  • Sell or rent other properties: You may decide to invest in a property portfolio, allowing you to sell these during retirement to receive lump sums or earn an ongoing rental income.

There are pros and cons to each of these. Downsizing can release a significant lump sum but property isn’t a liquid asset, what would you do if your home took longer than expected to sell? Renting property can deliver a regular income but there will be void periods, where the property is empty, and you may need to take a more hands-on approach than you’d like in retirement.

The ONS survey found that among the self-employed 9% favoured downsizing and 10% selling or renting property, none expected to borrow against their home. Among employees, 6% intended to downsize and 4% hoped to have a property portfolio that they could sell or would bring in rental yield.

The important thing to remember is that these incomes aren’t guaranteed and you’ll need to take responsibility for managing the investment, including ensuring it lasts throughout retirement.

2. How would this affect lifestyle plans in retirement?

Linking to the above point, how would your choice affect your retirement lifestyle? Downsizing, for instance, can seem like a simple way to release cash, but it may mean you need to move away from loved ones and other things you enjoy.

Likewise, being a landlord isn’t a hands-off task. Even when you use the services of a letting agent, you’ll still need to be involved and make decisions. If you’re hoping for a retirement where you don’t have these commitments, it can affect your lifestyle goals.

Alongside deciding how to create an income, you should think about the kind of retirement you’d like.

3. What will the cost of investment be and how will tax have an impact?

The cost of investing in property can be significant. Whether you live in the property or plan to let it out, you’ll need to ensure it remains in a state of good repair and keep up with mortgage repayments. If you choose to enter the Buy to Let market, there will be other costs to consider too, from vetting tenants to meeting safety standards.

What’s more, you’ll also need to consider how the income you’ll generate from property will be taxed. Income Tax and Capital Gains Tax should both be considered, depending on your plans, other forms of tax may have an impact too. Tax rules can be complex, if you’re unsure how your investments could be affected, please get in touch.

4. Have you considered the impact of legislation?

This is an issue that is particularly important for those that plan to use a rental yield as income in retirement. Government legislation has been becoming more stringent in recent years. Landlords now have significant responsibility towards their property and tenants. This can eat into the profits and mean you need to invest more time too.

While we can’t see what will happen in the future, you should expect further legislation, which may affect income. As a result, it’s important that a buffer is built into rental yields and what you need.

Changes to legislation could also affect those planning to sell or downsize too. For example, tax changes could make selling a second property more expensive though, such as through increasing Capital Gains Tax.

5. Are your investments diversified?

You shouldn’t put all your eggs in one basket, especially when it comes to long-term wealth. Investing in property may be your priority but it’s important this is diversified. For many people, including those that are self-employed, paying into a pension can provide security in retirement, for example. This can be done alongside investing in property, giving you assets to fall back on if needed.

If you’re hoping to invest in property with a long-term time frame in mind, please get in touch. We’ll help you understand how it could create an income in retirement, what your alternatives are and, if you decide to proceed help you take the first steps.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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