Why property should be part of your pension plan!
If you want to ensure you have a decent, comfortable retirement, property should be a crucial part of your pension plan.
This article is a classic lovemoney.com article which has been updated for 2010.
I completely understand why people are down on property after the last couple of years. The illusion that things would always be completely perfect, with prices forever on the rise, has been well and truly exposed.
But for all that, I still believe that property is a good long-term investment, and will serve me well in my retirement.
Around 40% of UK households' net wealth is tied up in property, compared to 30% in pensions. And there are a number of very sensible ways that housing wealth can be used in order to make pensioners' lives a bit more comfortable.
Related how-to guide
Get ready to retire
There are a lot of things to think about as you get closer to your retirement. But the early you start to prepare, the better.
See the guide
1. Reduce living costs
Related how-to guide
Get ready to retire
There are a lot of things to think about as you get closer to your retirement. But the early you start to prepare, the better.
See the guideIf you own your own home, you aren't forking out on rent each month. Owning your own home can cut your expenditure each month by 30% for single people, or 40% for couples
2. Releasing equity
You can release the equity you have built up in your home through one of two ways. You can either downsize to a smaller property, or - if you don't want to move - you can sign up to a specialist equity release scheme. Find out more about equity release
3. Renting out rooms or investing in extra property
In 2006, there were around 16,000 boarders and lodgers living in pensioner households. While this remains quite small, it is likely to increase in the coming years.
Property plays a part - but not all
The crucial factor in all this, in my view, is that property should definitely play a part in your pension planning. But it should not be viewed as a substitute for your own pension - it's there to complement your existing pension plan, not to replace it.
That's an important distinction, because if you're unfortunate enough to be retiring at the same time as another housing blip - and inevitably, there will be further blips down the line - then you don't want to have all of your eggs in the housing basket.
It's the same with any investment. Spreading the risk is the best way to ensure you are not out of pocket when the time comes to sell up.
It works both ways; just as you don't want to be relying completely on a property to cover your expenses as a pensioner, many feel uneasy about relying completely on a pension plan. I would probably include myself in that category, hence I view my property not only as somewhere to live - its obvious primary purpose - but also a supplementary asset to my pension.
However, housing wealth simply won't be an answer for everybody - currently, more than 20% of Brits aged 50 or over have no housing wealth at all to call on to help them.
For those people, they will have to look at their existing pension plans, and the state pension, and work out whether they need to be putting extra aside for when the time comes to retire.
Cleaning up equity release
Equity release plans need to improve, however, before property can play a more significant role in pension planning.
Now I'm a big fan of equity release as a concept, as I explained in this video. I am encouraged by the steps the firms involved with the sector have taken to clean up its previously murky (and merited) reputation. A significant element in this, in my opinion, is for the vast majority of these plans to come through independent financial advisers. Watch my video to find out more about this.
The latest figures from Safe Home Income Plans, the equity release trade body, showed that the proportion of equity release products going through intermediaries reached 74% in the third quarter of 2009 - a 10% jump on the previous quarter.
Recent question on this topic
- Gary20006 asks:
What is is the best thing I can do to get a retirement income?
- MikeGG1 answered "Gary If you are working abroad, you probably don't qualify for adding to your ISAs or for pension..."
- MikeGG1 answered "Make sure you don't overpay by more than the terms of your mortgage allow. Typically,..."
- Read more answers
This is great news in my view - pensioners can be very vulnerable people, and I would be much happier knowing that should my grandparents want to pursue an equity release plan, they were doing so via a broker, and not dealing direct with the provider.
The role of advice, in clearly explaining and outlining the consequences of proceeding with an equity release plan - and more importantly, which plan to go for - is vital. And that advice is better coming from an independent adviser, than a tied salesman, in my view.
The equity release industry needs to continue stepping up its game, offering more attractively priced and innovative products. Only then will it represent a viable option for more of us in retirement.
Most of you agree about property...
It appears that the vast majority of you agree with me about the role of property in pension planning - lovemoney.com did a poll back in August, investigating your attitudes on the subject, with 99% of you who have invested in property maintaining it is a good investment for retirement.
However, I share my colleague Jane Baker's concern that a tenth of you view property as your only piece of pension planning. This is one hell of a gamble, and not one I'd be comfortable with.
Pensions may be far from perfect, but they still offer outstanding tax benefits, compared to alternative investments or saving schemes. And with both the Conservatives and Labour promising schemes to improve the state of pensions in this country, things may be on the up again for pensions.
Property is part of the answer to planning for your retirement - but it isn't the only answer. You can't afford to turn your back on pensions altogether.
If you're worried about how well you're preparing for your retirement, why not sign up to our ? It will help you figure out what you need to do, step-by-step.
More: The danger of using property as a pension | Turn your pension into a million pounds!
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Comments
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I would neither advise nor partake in any kind of pension scheme, put simply you pay an arm and a leg for nearly all your working life for someone else to hold your lump sum and pay you a pittance in pension. ( i watched my father sink boatloads of money into his pension that somewhwere along the way evaporated) Purchase a second house and rent it out, the rental will cover the mortgage, and even a property manager, therefore you pay nothing, with the exception of times between tenants and the odd building expense too small to claim for. The house will be paid for when you retire giving you the full rental income, or you can sell your house (lump sum) its all yours, and you havent had to sacrifice your lifestyle all those years. better still purchase two. without going into tiny details i think this is a fantastic plan :)
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Judging my the performance of the pensions that I have ! My cat could do better by doing nothing and leaving it in his cat basket... Having worled in financial services and sold to fund managers here in London I can declare that from a professional point of view and a personal one they are absolutely worse than useless ! AXA are you listening, property all the way people or manage your own portfolio !
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"I would be much happier knowing that should my grandparents want to pursue an equity release plan, they were doing so via a broker, and not dealing direct with the provider." and I would be much happier if they were getting really independant advice! Not from ANYONE that will make a PENNY out of them. Equity release is a VERY expensive way of getting money out of a property. [b]In most cases, people would be better advised to downsize and or move to a cheaper area. [/b]Aged 65 they may not want to do this - they may want to stay in the family home etc. But they need to be encouraged to look forward to what will be a suitable place to live in in 10 or 15 times, when they can't manage the garden / stairs etc. nb i know that some equity release arrangement can be ported if you move home, but if it is likely that they will have to move at some stage, then there are lost of excellent reasons for making the move as soon as possible: - it is MUCH easier to cope with housing sales and purchases when you are 65 and fit than when you are 80 and getting a bit doddery. - Getting rid of furniture and possession may seem too hard to choose to do at 65 - beleive me it will be a lot harder at 80, perhaps when one of the couple has died. - And the sooner you move, the sooner you can settle in, make friends in the neighbourhood and start going to new local activities, whilst you are still fit. These are difficult decisions anf inances are only a part of them. I don't disagree though that having a house mortgage free by the time you retire (or preferably at least 5 years before that, in order to allow a bit of leeway in case of job problems, ill health etc) is an excellent aim. And I would stress that this is in addition to having good pension arrangements. One other thing that is important, is that if you are fortunate enough to be in a salary related pension scheme, you should be aiming to clear the mortgage without using the tax free amount you can get from your pension - it is usually a MUCH better deal to not take that lump sum and get a larger pension. manzanilla
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20 April 2010