Should your home be your retirement plan?

Recent house price rises will have eased worries but, as Chiara Cavaglieri reports, now may be the time to abandon the idea of 'property as a pension'

Millions of Britons are still banking on their homes to see them through old age despite property prices falling from their highs of 2007, according to new research from retirement specialist Liverpool Victoria. And it's not just the young but also the more mature who are putting their faith in property. Liverpool Victoria says as many as 1.3 million over-50s plan to cash in their homes to help fund their retirements, despite losing an average of £27,250 off their property values over the past two years.

These figures may reflect a growing confidence in the investment value of property after Nationwide's figures for November showed that house prices have risen by 0.5 per cent – the seventh consecutive rise this year. The apparent revival of the market has rekindled the old debate over whether to rely on your home to fund retirement, instead of the more conventional pension plans.

"The British are a race of property owners," says Jane King from independent financial advisor (IFA) Ash-Ridge Asset Management. "Our love of bricks and mortar goes back generations. Despite two recent recessions, property prices continue to rise, and with interest rates at historic lows it would seem an ideal time, for those with a medium- to long-term view, to purchase property for retirement."

Using property to fund your retirement has several clear benefits, including flexibility; you can sell the property when you choose to, assuming you can find a buyer, and any money you raise can then be spent however you like, whereas a pension must be used to purchase an annuity.

The counter argument is that property prices are unpredictable and anyone unfortunate enough to retire when the market is in the doldrums could find it impossible to sell, or risk having inadequate funds. Despite these dangers, one in six of the over-50s questioned by Liverpool Victoria say that they plan to add value by making home improvements, and nearly a third say they will simply bide their time until property prices have recovered.

Several options are open to you if you're planning to use your property to fund your retirement. One of the simplest is to sell up and trade down to a smaller home. Many homeowners plan to keep upgrading their homes until retirement in order either to downsize and take any profit free of tax or maximise the amount achievable on equity release. This will often mean a bigger mortgage, but that could be a price worth paying.

"I would much rather pay the additional mortgage repayment than a similar amount into a pension plan over which I have no control either in terms of performance or what I can do with the bulk of the money," says Colin Jackson from IFA Baronworth Investments.

If you prefer to stay put, you can take out an equity release plan. There are two main types of equity release: home reversion schemes and lifetime mortgages. With the former, you sell a percentage of the property in exchange for either a lump sum or income. If you still own equity any falls or increases in the value are shared with the home-reversion company.

Taking out a lifetime mortgage is the most widespread equity-release option. It allows you to secure a loan against the value of the house, with interest repaid along with the loan from the final sale of the property. Anything left goes to your beneficiaries. One of the most popular types of lifetime mortgage is the drawdown, which provides you with cash in stages, as and when you need it, instead of in a lump sum, thus keeping interest to a minimum.

Equity release does, however, come with some complications. With lifetime mortgages and home reversion there will be also be substantial arrangement fees for setting up the scheme as well as legal and valuation bills to contend with. Your property is likely to be valued quite conservatively by an equity release company and, more importantly, there will be a significant impact on any inheritance you hope to pass on.

Depending on your age at the time, it may actually be difficult to secure a loan for the amount that you need. For example, lenders may be willing to lend as much as 60 per cent of the property's market value to a 75-year-old, but only a maximum of 20 per cent to someone aged 60 because they are expected to live longer and generate more interest. Home reversion companies make their money by paying far less for the proportion of your home than it is worth on the market. The amount you get paid will vary from one provider to the next, but some can pay as little as 30 per cent of the value. If you wanted to sell half of your home, worth £200,000, you might receive only £30,000 for it.

"The interest rates and charges of these plans must be factored into calculations as they can be expensive if effected early," says Ms King. "This is especially true if leaving assets on death is important. Independent advice should be sought before committing to one of these schemes."

By far the most compelling argument for opting for a pension over property is the tax relief. Pension contributions attract tax relief at the basic rate of 20 per cent. So, for every £80 put away, £100 goes into your pension pot. Higher-rate taxpayers can claim back a further 20 per cent. As yet another tax incentive, you can take up to a quarter of your pension fund as a tax-free lump sum. In addition, occupational schemes are boosted by employer contributions.

Pensions also offer you the chance to spread investment risk – something that can not be said of property. "There is considerable risk in placing all your bets on one asset class – residential property. By contrast, if you use pensions and ISAs you can diversify into all asset classes, equities, bonds, commodities, private equity, overseas assets etc and you can achieve a broad spread of holdings," says Tom McPhail from IFA Hargreaves Lansdown.

Risk takers: 'We've got better things to do with our money'

Georgina Hockley, 24, a company secretariat assistant for British retail group Kingfisher, and her partner, Stuart Dean, 29, a product specialist for an IT company, have recently purchased their first home in Reading and plan to use the property as their main retirement income.

"Lots of people go for the normal pension route but you can never really hang your hat on them," says Georgina.

The couple moved into their two-bedroom bungalow, costing £200,000, just a few months ago. Georgina has a small company pension but intends to overpay on her fixed rate mortgage from Newbury Building Society, although she is concerned about relying on property over a pension.

"If it all goes wrong then we'll have to think about it sensibly at the time. But there are risks involved with everything, including traditional pensions," she says.

"We're both young and we've got better things to do with our money. This way we can just put any extra income we get into the mortgage and have a bit of fun at the same time."

Suggested Topics
Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind-the-scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
News
Winchester College Football (universally known as Winkies) is designed to make athletic skill all but irrelevant
Life...arcane public school games explained
PROMOTED VIDEO
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
News
i100(and it's got nothing to do with the Great British Bake Off)
News
Angelina Jolie with her father Jon Voight
peopleAsked whether he was upset not to be invited, he responded by saying he was busy with the Emmy Awards
News
Bill Kerr has died aged 92
peopleBill Kerr appeared in Hancock’s Half Hour and later worked alongside Spike Milligan and Peter Sellers
News
news It's not just the world that's a mess at the moment...
Sport
footballPremiership preview: All the talking points ahead of this weekend's matches
News
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
people
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
News
i100
Sport
Mario Balotelli pictured in his Liverpool shirt for the first time
football
Life and Style
tech
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Data Scientist (SQL,Data mining, data modelling, PHD, AI)

    £50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

    SAS Business Analyst - Credit Risk - Retail Banking

    £450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

    Project Manager - Pensions

    £32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

    KYC Analyst, Birmingham - £200-£250 p/d

    £200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

    Day In a Page

    Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

    The phoney war is over

    Russian troops and armour pour into Ukraine
    Potatoes could be off the menu as crop pests threaten UK

    Potatoes could be off the menu as crop pests threaten UK

    The world’s entire food system is under attack - and Britain is most at risk, according to a new study
    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
    From Mozart to Orson Welles: Creative geniuses who peaked too soon

    Creative geniuses who peaked too soon

    After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
    Caught in the crossfire of a cyber Cold War

    Caught in the crossfire of a cyber Cold War

    Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

    Salomé: A head for seduction

    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
    From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

    British Library celebrates all things Gothic

    Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
    The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

    Is the Hard Rock Café worth fighting for?

    The restaurant chain's owners are currently embroiled in a bitter legal dispute
    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

    In search of Caribbean soul food

    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
    11 best face powders

    11 best face powders

    Sweep away shiny skin with our pick of the best pressed and loose powder bases
    England vs Norway: Roy Hodgson's hands tied by exploding top flight

    Roy Hodgson's hands tied by exploding top flight

    Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
    Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

    Di Maria and Ronaldo: A tale of two Manchester United No 7s

    They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone