Kay Warner is 37 and does not have a pension. Like many people, she plans to fund her retirement with property.
Many say that their property is their pension, with 18 per cent of 58 to 80-year-olds surveyed by the pension firm Standard Life saying that they were banking on their home to fund a retirement.
But is it really possible to plan your income around house prices? We weigh up the pros and cons.
Warner, who is from Lincoln, never signed up for her workplace pension in the 15 years she worked in retail. When auto-enrolment was introduced in 2012, automatically signing up employees aged 22 and over to a workplace scheme, she opted out.
“I’m distrustful of pensions,” Warner said. “The rules change all the time, you hear about people paying into their pension all their lives and then the goalposts move and they end up with less, or they have to work for longer before they can access their money. That makes me worry.”
Warner is now self-employed. She owns the house next door to her own, which she rents out for £120 a night as a holiday cottage. Last year it earned her £20,000 in profit after bills, insurance and expenses. She plans to buy another one or two rentals and will downsize from her three-bedroom home to free up cash when she is older.
“I’m happy with my plan,” Warner said. “I do worry that I won’t have enough money, but I feel that I am in control. I can always sell the house and release money if I really need it.”
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The pros of property
The reason so many people prefer property is obvious: house prices have increased by an average of 93 per cent over the past 20 years, from £146,383 to £282,776, according to Land Registry data.
It’s not just our homes that have increased in value. Buy-to-let has become a booming industry as rents have increased from an average of £773 a month in 2005 to £1,293 today.
There were about 4.4 million privately properties across England and Wales in 2020-21, according to the English Private Landlord Survey, up from 3.1 million in 2008-09. The Office for National Statistics says there are 172,500 second homes used as holiday homes, short-term lets, or as a second home for work purposes.
Rory Brand from Johnston Carmichael, the financial advice firm, said: “What is great about property is that it can provide a strong income source. The idea of a buy-to-let or holiday home doesn’t feel as scary as a pension, because we’re more used to it.”
Unlike a pension, where your money is locked away until you are at least 55, any money you make from renting out your home can be accessed immediately.
The cons
Tax is a big consideration for any second-home owner and the tax breaks available to landlords have become far less generous.
When you buy a second home, you pay an extra 3 per cent stamp duty levy. This means that for properties between £250,000 and £925,000, you pay tax at 8 per cent rather than 5 per cent, but only on the proportion of the property’s value over £250,000. On a £300,000 house that would mean a stamp duty bill of £11,500 — as you are paying 3 per cent on £250,000 and 8 per cent on £50,000.
Buy-to-let landlords used to be able to deduct 100 per cent of their mortgage interest from their tax bill, but this has been replaced with a “tax credit” for 20 per cent tax relief on mortgage interest payments. This will extend to holiday lets from April 2025 and means that higher rate taxpayers, which many landlords are, can expect to see their tax relief halved.
You will pay income tax at your usual rate on any rent you get, although you can deduct costs associated with running the property. When you sell you will pay capital gains tax (CGT) on any increase in the price you paid for the property. CGT is charged at 18 per cent for basic rate taxpayers and 24 per cent for higher rate payers.
“Property isn’t particularly tax-friendly,” Brand said. “A pension is completely the opposite — you get tax relief when you pay money into it, it grows tax-free, and you can get tax-free cash.”
Other costs to think about include maintenance and repairing any damage. Consider void periods — you may struggle to fill a holiday home in the off-season, for example, or may have months between long-term tenants.
Those who do not own a second property, but are relying on their own home increasing in value to fund their retirement, have another dilemma: you can’t live off your housing wealth while you are still in the property. Downsizing can free up wealth but many people find it difficult. One alternative is an equity release loan, where you release wealth from your home but remain living there. The loan is typically repaid when the house is sold, usually when you die or move into care.
This can be expensive though — the average equity release rate is 6.65 per cent, according to Moneyfacts, and because the interest usually rolls up rather than being paid off like a standard mortgage, your debt will double roughly every 11 years. This can be an issue if you are hoping to leave an inheritance, as there may be no equity left in the property by the time you die.
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‘I’m relying on my pension for retirement’
When Richard Lunn moved in with his partner in 2011, he decided to rent out his three-bedroom house in Nottingham. He hoped the income would eventually fund his retirement.
“But it turned into a disaster,” said Lunn, 50, a self-employed health and safety consultant. After being forced to evict his tenant in 2015, he decided to sell up instead.
“The damage to the house, losses from the rent and legal costs probably cost me between £20,000 to £30,000,” Lunn said.
It was his second bad experience with property. In 2006 he paid a £15,000 deposit for an off-plan two-bedroom apartment in Barnsley, South Yorkshire, which he planned to rent. But the property company went into liquidation and the apartment was never built. Lunn lost all of his money.
“Property is a headache — you’re constantly worried about problems with tenants or being called over to fix the boiler,” he said.
These days he is focusing on his pension instead. He saves £20,000 a year into a self-invested personal pension (Sipp) with the financial services company Hargreaves Lansdown, and has so far built a pot of £235,000. He hopes it will be worth £500,000 by the time he is 57 so he can retire.
“There’s no hassle with a pension and there are lots of tax benefits for saving into one,” he said.
The pros of pensions
Pensions are about the most tax-efficient way to save. For a basic-rate taxpayer, an £80 pension contribution is effectively topped up to £100 by the government. Your pot then grows tax-free, and once you turn 55 (rising to 57 from 2028), you can access your funds and withdraw up to 25 per cent as a tax-free lump sum.
Those who are employed get money added to the pot by their employer too. Under auto-enrolment, you have to contribute a minimum of 5 per cent of your annual salary and your employer pays in another 3 per cent. Some employers are more generous.
Someone earning £30,000 a year who started saving into a pension at 22 would have a pot worth £183,000 by 68 if they contributed the minimum amount, according to Hargreaves Lansdown. This factors in inflation and assumes annual investment growth of 5 per cent and a 3 per cent wage rise a year. That could provide an annual income of £11,200 a year in retirement.
If the worker contributed 10 per cent of their salary and their employer matched this, they could end up with £458,000 and a potential annual income of about £28,000.
“One issue with property in retirement is that your wealth is primarily impacted by the UK economy and sentiment,” said Kirsty Stone from the financial advice firm The Private Office. “A pension invested globally can smooth out governmental decisions or country specific issues, and benefit from growth in other economies.”
The stock market has also performed better than property prices over time. The MSCI World Index, which measures the performance of equity markets across developed countries, returned 529.15 per cent in the 20 years to December. UK house prices were up about 93 per cent over that period.
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The cons
That money in a pension is locked away for decades is off-putting for many savers. Others find it difficult to know how much to save or where to invest their money. Greater freedom over how you can use a pension was introduced in 2015, meaning you were no longer forced to buy an annuity policy that provided a fixed income. But with the greater freedom came a rise in scams, with savers being convinced to move their pensions into high-risk and unregulated schemes, often resulting in a large tax bill.
A series of mis-selling scandals in the late 1980s and early 1990s led about two million people to opt out of generous workplace schemes and switch to personal pensions, giving up guaranteed incomes in the process and earning a lot of advisers a lot of commission.
Constant tinkering of the rules by government has also created uncertainty and distrust. For example, the lifetime allowance, which is the maximum you can save into a pension while still getting tax relief, changed multiple times before being scrapped entirely last year (and abolished from this April). The Labour Party has vowed to reinstate it if it wins the election in July. This makes it difficult for savers to plan.
The Women Against State Pension Inequality (Waspi) campaign was set up in 2015 by women who argued that they were not properly informed about increases to state pension age and had been left distressed and impoverished as a result.
Many people find pensions complicated to understand. “Sometimes people don’t know where they are with their savings, don’t open their pension statements and ignore it,” Coles said. “But there is a risk that if you don’t engage and assume you’re covered by auto-enrolment, you may not be on track with your pension savings.”
Brand said both property and pensions could be a good way of funding your retirement. “Neither is risk free, and they both have pros and cons, but they both complement each other,” he said. “But for me, property should be a diversifier to your main income source.”