Brits are notoriously property-crazy! Not only do they aspire to home ownership, but they also see property as a financial instrument to fund retirement. Historically, conditions have been favourable for equity to be syphoned-off when downsizing. The property-market-savvy proportion of the population have also seen good returns for investment in rental property. However, there are several good reasons why you shouldn’t rely wholly on property to fund your retirement anymore.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it.
The property craze
In many other countries, property is simply a means for shelter and a place to raise the family. However, in Britain people have a very different view on what it is to own property.
Subsidies provided by the UK government, make property ownership reasonably straight forward.
Aside from the current crisis whereby younger people are struggling to get a foot on the property ladder, this was not the case for the last generation.
There are tax benefits such as the Principal Private Residence Relief (PPR) and mortgage interest deductions for landlords, as well as government-run help to buy schemes.
Finance for property is also relatively easy to obtain too.
To this extent, those that could afford to, have ventured out to own not only one home, but multiple homes.
Too much wealth focused in one asset
In the 80’s and 90’s, many property owners were laughing all the way to the bank as they sold their homes, cashing-in on tens of thousands of pounds in profit, and then using that money as a down-payment on their next, larger home.
Subsequently, wealth could be built-up within the family home by making a few careful decisions at the right time.
The current generation are likely to not be as fortunate. With property prices so high, it is suspected that they will be paying off their mortgage actually into retirement.
If you own a home and your retirement plan is to sell your “by then” million-plus-pound property and downsize, then it is worth assessing the risk of relying on a single asset to serve you in retirement.
Property doesn’t generate significant income
Of course, there are some that will be able to take a tidy retirement from their years of rental property investment. However, this is most relevant where their property portfolio is extensive, and mortgages are non-existent come retirement.
Unlike a business, property doesn’t generate significant income.
First, there is a ceiling of income which a property can earn, due to market factors. Secondly, properties cost a lot in maintenance and buying and selling fees, which can dwindle away profits very quickly, even without a mortgage.
Owning the house you live in won’t generate any income. It will only generate costs.
However, even owning an investment property, or a small portfolio, there are so many variables that could change over time, it is always wise to combine property investment with a wider retirement plan.
- What if the market rent price drops?
- What if house prices fall?
- What if you are unable to sell if you want to?
- What if tax legislation changes? This is already happening..
Reliance on property exposes you to volatile house prices
Property prices rise and fall with economic cycles, including unusual spikes and complete crashes.
Price fluctuations are due to many factors, namely economic cycles, the availability of credit and demographics – all of which are out of your control.
When creating a solid retirement plan, it is not sensible to rely heavily on anything which is open to such risk.
Whilst over the long-term property can be an interesting and lucrative investment, in isolation, it could leave you open to disappointment at best, or a tough retirement at worst.
Low risk retirement planning
The best type of retirement plan involves not putting all your eggs into one basket. Diversification is the key.
It is not wise these days to rely on your home to release equity when you eventually downsize. What if you can’t sell or what if property prices crash?
It is also not wise to rely solely on income, or equity, from a small property portfolio.
With both these options, too many variables are at stake.
Instead, look to combine the wealth in your home and any equity or income stream from rental properties, with other types of investment.
This way over the long-term you can stand the best chance of living the retirement you choose to.
A financial adviser can help you to build wealth over your lifetime while securing an income stream for when you finish work.