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Is property still a reliable source of retirement income?

Real estate has long held a reputation as a robust asset and a safe investment choice due to its ability to deliver long-term growth. 

Indeed, throughout the pandemic, many turned to the property market, seeking financial opportunities that have been historically more reliable during a period where other potential assets haven’t looked as secure. 

And it’s easy to see why. House prices have increased month-on-month, up 12.4% to a new record high of £281,000 in April. As such, capital growth alongside rental yields from buy-to-let property investments offer the potential for long-term profit. Meanwhile, there is also the option to sell further down the line and invest the money in other ways. 

That said, while property may offer an opportunity to diversify when deciding on a pension investment strategy, it does not come without risk, especially in times of economic uncertainty. 

So, what should pension planners consider when considering using property as a source of retirement income?

The risks

Real estate may be an attractive investment proposition because of its recent strong performance, but there is no guarantee that this will last forever.  

Indeed, experts are predicting that high levels of inflation are set to cool house price growth later this year, as confidence is hit by the cost-of-living squeeze. And prices are set to continue to rise at their fastest rate for 40 years, with the Bank of England predicting that inflation could climb to 11% in the Autumn.

Due to rising inflation and the cost of living, we may find ourselves in another recession. Once a recession hits, the real estate market typically slows down or falls in value. As a result, homeowners run the risk of suffering capital losses on their houses. They also run the risk of negative equity, which happens when a homeowner has paid more for a home than it is worth.

However, perhaps the most significant risk is illiquidity. This refers to an asset that cannot easily and quickly be sold or exchanged for cash without a substantial loss in value. Houses are an expensive asset and carry a lengthy sales process, so any retirees relying on the sale proceeds to fund their retirement will need to plan ahead and have a backup plan in mind, in case the sale falls through or the market crashes. Failing to do so may leave them asset rich, but cash poor. 

Accordingly, individuals seeking property as an alternative to a pension to fund their retirement must consider the above to ensure that it is the right move for them. 

Seeking financial advice

As with any financial asset, property investments carry risk, especially if someone is putting all their eggs in one basket and using it to completely fund their retirement. Therefore, anyone considering taking a considerable portion out of their pension pot – which can have serious implications and tax penalties – should first seek independent financial advice. 

The risk may outweigh the reward for some people. If this is the case, an independent financial adviser will be able to recommend a different pension investment that may offer greater security. A pension pot, for instance, is likely to provide retirees with additional tax benefits because the investments are exempt from the likes of capital gains tax and stamp duty.

At My Pension Expert, for example, our team of expert advisers can assess the entirety of a client’s financial circumstances, retirement requirements, and risk appetite and help them decide if property investment is a viable option for their retirement strategy that will help them meet their retirement goals. 

In the end, adding property to an investment portfolio might be the right choice for some, with the potential for some sizable rewards. However traditional pensions should not be discounted, as they may provide more security and tax efficiency to help people prepare for a comfortable retirement.