In 2020, one in four Britons named investing in property as the safest way to build wealth for retirement, according to the Office for National Statistics. Their views may have changed as the mortgage crunch threatens a house price crash and more homeowners approach retirement with unpaid mortgage debt.
While it is possible to turn your home into cash into retirement, say, by downsizing or releasing equity via a lifetime mortgage, it is risky in practice.
And it should never be used as an excuse to stop building other sources of retirement savings, primarily in a pension or tax-free Isa.
The idea that a property could become a substitute for a pension arose at the start of the millennium, after the dot.com crash in March 2000.
Over the next three years the FTSE 100 crashing by more than half from a peak of 6,930 on December 31, 1999, to just 3,287 by March 12, 2003.
This destroyed investor confidence after the long bull runs of the 1980s and 1990s and many sought solace in resurgent house prices.
Nationwide figures show the average property value rose from £114,368 in 1994 to £295,548 in 2007, just before the credit crunch.
Homeowners enjoyed a tremendous accumulation of wealth in that time and although prices fell after the financial crisis, they steadily recovered after the Bank of England slashed interest rates to 0.5 percent in March 2009.
Buy-to-let helped underpin the property dream, with two million becoming amateur landlords to generate rental income from tenants and capital growth as prices looked like they might rise in perpetuity.
Now we’re all having a reality check.
House prices fell 4.6 percent in the year to August, latest Halifax figures show, the fastest drop since 2009 with further falls expected.
Buy-to-let landlords are fleeing in droves to escape a tax crackdown aimed at driving out rogue operators and levelling the playing field with first-time buyers.
Suddenly, using your property as a cash machine in retirement looks a lot less attractive.
There have always been risks to relying on property for retirement, said Megan Jenkins, partner at wealth manager Saltus.
The first is that if most of your wealth is concentrated in your home, you will have no financial back up if prices crash. Second, property is a highly “illiquid” asset, which means it can take time to turn it into ready cash, especially today as demand dries up.
Those planning to downsize to a smaller property will end up with even less money after deducting estate agency and removals charges, plus stamp duty on their new home and the cost of doing it up.
Downsizing to somewhere smaller and cheaper works better in theory than practice, Jenkins said. “Older people have a huge emotional attachment to their home, and are reluctant to leave.”
Those still keen to downsize need to prepare in plenty of time. “The house buying and selling process can be a long one, particularly in a slow market.”
Demand for equity release, which involves unlocking the capital in your home and turning it into cash, has jumped as pensioners struggle to survive the cost-of-living crisis, according to later life specialist Senior Capital.
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Figures from industry body the Equity Release Council show that new customers took a £94,266 lump sum from their home between April and June.
That’s down sharply from £132,331 last year, as falling house prices reduce equity and rising interest rates drive up the cost of taking out an equity release lifetime mortgage.
Equity release may be a handy last resort but it is complex and may reduce inheritances, which requires careful family discussions.
Unfortunately, too many have no choice but to rely on their property in retirement, because they failed to afford to build enough pension or Isa savings.
It’s getting worse as one in five have either reduced or stopped contributing to their workplace pension due to the cost-of-living crisis, according to new research from M&G Wealth.
Its pension specialist Kirsty Anderson said reducing contributions might seem like a quick fix but could backfire in the longer run. “Even taking a short break could have a significant impact in later life.”
While property wealth does give pensioners more choices but it pays to have a plan B.
As ever with investing, the old maxim applies: Never put all your eggs in one basket. Your pension is your pension. Your home is something else altogether. Don’t confuse the two.
