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Is investing in property a dangerous retirement strategy?

“Property is a better bet than a pension.” 

These are the words of the former Chief Economist at the Bank of England (BoE), Andy Haldane, who raised some eyebrows back in 2016 by suggesting that property is a better investment for retirement than a traditional pension. But is this truly the case? 

In the current economy, where interest rates remain low and inflation has risen to record levels, there is a clear case to be made for entering the property market. Especially given that house prices have rebounded at pace since the first lockdown, buy-to-let properties in the UK have thrived, increasing in value by 5.8% year-on-year. 

That said, although it may be prudent not to have all your eggs in one basket when deciding on a pension investment strategy, and property can comprise a valuable part of a retirement plan, Haldane’s assertion may be ill-advised for some. 

So, what should pension planners consider when weighing up their options? 

Volatile markets and hidden fees 

First things first, although the property market can be a good place to invest savings in the current climate, as investors will earn a rental income alongside the opportunity for long-term capital growth, it is important to note that house prices don’t always reliably head upwards.  

Indeed, the property market typically slows or falls in value whenever a recession hits. This means that individuals will likely see their property lose capital, as well as leaving themselves open to the possibility of negative equity, which happens when they have paid more money than the property is worth. This is seldom a problem for those with a pension pot, as many have enjoyed positive pension growth this year, despite the difficult economic climate. As such, property alone might not necessarily make for the most reliable stream of income in retirement.  

Equally, individuals should be mindful of ongoing costs associated with running a property, which might chip away at their retirement funds. This can be anything from landlord’s insurance, to maintenance fees for wear and tear, property management, letting fees, or even potentially furnishing the property. Letting fees alone are usually somewhere in the region of 15%, and this is before retirees have factored in any void periods where the property is vacant, which is likely to happen from time to time. Once again, this may leave retirees financially vulnerable if they have no contingency plan. 

Taxation and liquidity risk 

Tax burdens can be steep, too. Buy-to-let property owners typically end up footing a higher tax bill than before, owing to legal, stamp duty, and survey fees, as well as a number of taxation changes affecting landlords. For example, there is a 3% stamp duty surcharge for second homes, as well as increased capital gains tax. Together, this means that additional fees can accumulate, making the cost of buying then owning an investment property even steeper, potentially diminishing the returns needed to fund a person’s retirement. 

Liquidity poses yet another risk – that is, how easy (or difficult) it is for an individual to retrieve their money when they need it. Given that selling a property will likely take several months – if not longer – any retirees relying on the sale proceeds to fund their retirement will need to plan ahead and have a back-up plan in mind, in case the sale falls through or the market crashes.  

Put simply, those looking to property rather than a pension to fund their retirement must consider all these factors to ensure that this is a viable option for them. 

 Considering financial advice 

Like any financial asset, investing in property carries risk. If this is something an individual is seriously considering, it is vital that they seek independent financial advice first, as taking out tens of thousands of pounds from their pension pot to fund a property can have serious implications and tax penalties. 

 For some people, the risk may outweigh the reward. If this is the case, then an independent financial adviser (IFA) will be able to suggest an alternative pension investment that will see an individual through retirement more reliably. For example, retirees are likely to enjoy more tax relief from a pension pot, as these investments are sheltered from the likes of capital gains tax and stamp duty.  

Ultimately, owning a property as part of a wider investment portfolio can be a smart move, offering the potential for some impressive returns. However, individuals should not discount traditional pensions, which may offer more security and tax efficiency to set them up for retirement.