Investing in property is a popular way of preparing a retirement nest egg. I can see why owning an asset that you can see and touch is appealing. In fact, I have my own modest overseas investment property. Shares in companies often seem too esoteric. But property is easier to understand.
In principle, buying a property to rent out is an attractive alternative to conventional pensions. A relatively small lump sum can be geared up into a large investment using mortgage borrowing. Over the years to retirement, mortgage repayments, plus the management and maintenance of the property are mostly, if not completely, covered by the rental income. Then, if all goes to plan, at retirement the mortgage is paid off and the rent provides a useful monthly income to tide you though your golden years.
It sounds great in theory but here are some reasons why you should tread carefully when putting your eggs in a buy-to-let basket:
• Property is inflexible and illiquid: you can't get your money out at short notice or in small amounts.
• Property is not tax-efficient: you will have to pay income tax on the rent and capital gains tax when you sell.
• Property is not easy to manage: tenants can and will contact you in the middle of the night or when you are on holiday to sort out plumbing problems or a lost key. But if you employ an agent to make life easier, you will reduce your rental income.
Even more flawed is the vast swathe of the population relying on the escalating value of their own homes to provide retirement comfort. Insurer Standard Life has conducted analysis of the UK housing and retirement markets and is predicting a bleak future for many people hoping to use their homes to provide their pensions.
Standard Life's calculations show that on average, across the UK, downsizing your property will only provide 16 per cent of your desired retirement income of two-thirds of your earnings.
"Across the UK, many people are pinning their hopes on a continuing strong housing market to provide the retirement of their dreams. The reality is somewhat different. Our analysis shows retiring and banking on your main residence to provide a sufficient retirement income is a potential retirement disaster unless you have made sufficient provision elsewhere," says Andrew Tully, senior pensions technical manager at Standard Life.
"It is vital people take control of their retirement planning, with the old saying of not having all your eggs in one basket never being more relevant. Property can be a valuable part of retirement saving, but it should not be the only option used."
I couldn't agree more.
There is another flaw in reliance on property. Yes, downsizing at retirement from a house to a flat can release a large chunk of capital, but the reality is that most people don't take into account how attached they can become to a family home. It can be a huge emotional wrench to sell up.
The alternative is equity release, which allows you to release capital while staying in your own home. You can do this either by borrowing against the value of your property using a 'lifetime mortgage' or selling a share in it to a 'home reversion' company. However, equity-release products are expensive and should be viewed as a last resort.
