Property or pensions? What’s the best way to fund your retirement?

Ask somebody how they plan to fund their retirement and you’ll get a whole host of answers. But, more often than not you’ll probably hear – “my property is my pension”.

With rising house prices, such a response seems perfectly sensible but, does relying on downsizing your property to fund your retirement really make sense?

According to May’s Nationwide House Price Index, property prices have increased 4.7% in 2016 but house price inflation is far from guaranteed and regional variations can be stark.

With returns from pensions dependent on investment performance and with funds locked away until 55, it’s perhaps not surprising that many feel more comfortable with bricks and mortar as an investment.

Property as pension

 

The downsides to relying on your property as your pension

But downsizing in older age is not always as easy as it sounds. A house half in size will not necessarily be half the price if you want to stay in the same area. Indeed, you might not be able to sell your property at the time and at the price that you need.

It’s also important to factor in the cost of moving. Stamp duty, estate agent fees, legal fees, removals all add up and are forecast to increase to over £15,000 by 2020.

When it comes to funding retirement, relying on one source of income is best avoided. For many, property will form part of their investment portfolio but property prices can be volatile so putting all your eggs in one basket is risky.

The upsides to workplace pension

Workplace pensions savings offer a number of benefits. Firstly, there’s the employer contribution that shouldn’t be under-estimated. When you pay in, your employer pays in too, so think of it as free money that you couldn’t get any other way.

On top of that you also get tax relief, so your investment is given an immediate boost. This is particularly valuable for higher rate or additional rate taxpayers, who will benefit from 40% or 45% initial tax relief – especially if they might be basic rate or even non taxpayers in retirement.

Recent changes to pensions allow savers to take their pension as cash from age 55 rather than having to buy an annuity. These changes provide much more flexibility in how you can access your pension savings.

The reality is we are all living longer and your retirement savings are going to have to stretch further. As a result, it’s never been more important to start saving early and diversify investments through a range of assets so you’re not overly reliant on one.

 

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