Beware risks of retirement funded by property

Pensioners in retirement

It’s not difficult to understand why people are attracted to property investment to provide income in retirement. The average UK house price has risen by over £20,000 in just the last twelve months.

According to surveys, property is seen as the most valuable method of paying for retirement, while pensions are the safest.

The combined value of pensions and property in the UK accounts for nearly 80% of all private wealth, according to the latest figures. Pensions alone make up 42% and property equates to a further 35%.

Based on the current property market, buying property to fund retirement may seem like a no-brainer, but you should be aware that there are some risks.

There are a number of tax incentives related to pensions, not least the tax relief on contributions and 25% tax free available when you take your benefits – and remember that, if you’re employed, your employer has been obliged to put funds into your retirement pot, too.

Buying property to fund your retirement is different. If the investment property increases in value, you should not assume that this would equate to an equivalent amount of profit when you sell it. There is the potential for the need to pay Capital Gains Tax which would be payable on any profit made when you sell the property. Inheritance Tax might also be applied to property, on death. This is not usually applied to pensions – but pensions are not always transferable on death.

Putting all your eggs in one basket to invest in a property is a good investment provided the property value remains stable or increases over time, but the financial crisis of 2008 showed what can happen when things go badly wrong.

Remember that things can go expensively wrong with property, just as they can with other investments. When considering the running costs of property, you should include maintenance, insurance, utilities and council tax. If you’re renting the property out then other costs can be added, including legal fees and agents’ fees.

Like other sources of income, Income Tax is payable on income from property but, unlike regular pension payments, remember that there may be periods when your property is between tenants and you have no rental income.

If you’re looking to invest in property, whether as a home for yourself in retirement or an investment for rental income, ask an Independent Chartered Surveyor for a building survey.