Your property is not your pension

Are you relying on your home to fund the lifestyle you would like in retirement?

That can be a great plan. However, there are historical precedents that prove that property is often, in fact, not always as attractive as it looks.

Hansel and Gretel found a cottage made of gingerbread that promised to satisfy them for the rest of their days. It turned out to be a trap laid by a wicked witch, trying to fatten them up to eat them herself.

Back here in real life, we remember the UK’s property boom and bust of 2007/2008, where many properties fell to half of their original value. Some of them have still not recovered their value to this day.

Nonetheless, as advisers, we’re not negative about property as a solid long-term investment. It’s a strategy that often works well. But, as with every investment, we like you to go forward knowing the risks and seeing the full story.

A closer look at downsizing

For example, if you are planning to downsize and live off the funds you free up from your home, you might be surprised at the hidden costs involved.

We had a client who owned a four-bed detached home which could realistically sell for £500,000.

They were thinking of downsizing, perhaps to a small three-bed bungalow they had seen at £350,000.

We pointed out that of the £150,000 they would gain, a big chunk would go in stamp duty, solicitor’s fees, estate agent’s fees, and removal fees. A total of £16,250, in fact, leaving them with £133,750.

If they invested all of that, they would currently be doing well to realise an annual income of 4%, which would give them £5,350 a year, or £445 a month in income. 

However, they had a few additional costs of their own. They were hoping to upgrade their car (£10,000), celebrate with a holiday (£5,000), and upgrade their new property (£20,000). That £35,000 took their gains down to £98,750, giving them income of £329 per month, or just £82 per week.

Perhaps a pension is the answer

The alternative, of course, is a personal pension that you can build over your lifetime, benefitting from tax relief at your marginal rate, 40% or 20%, plus contributions from your employer (if applicable).

Then there’s also the power of compound interest, gaining interest on your interest, driving the growth in your money, year in, year out. Benjamin Franklin summed it up: "Money makes money. And the money that money makes, makes money." 

This is most powerful when you start saving at a young age. Former pensions minister Ros Altmann nailed it when she said that in the long-term, a pension is the only place in the world where you can buy £50 notes for £20.

We’ll be delighted to balance your wishes against your future needs and advise you on the merits and risks of all the various options.

So, before you put your personal pension in second place, think of what Hansel and Gretel learned. 

You can’t always eat a house.