Despite the Stamp Duty Land Tax threshold going down to £250,000, the surging demand for houses could well last into 2022 according to Grainne Gilmour, Head of Research at Zoopla. This has been caused by a combination of several factors, but more importantly by an increase in demand for housing stock as homeowners are looking for more space as a result of the Covid-19 pandemic, coupled with a severe shortage of properties of all kinds, which has caused an increase in house prices of 7.3% over the past year.

According to Zoopla the price of an average UK house has increased by 30% since 2007.

So should you be considering if it’s time to switch your retirement fund from a pension into property, with such potentially large increases in property values available. Property has generally been seen as a sound investment, but is it right for you?

With property prices generally not showing any signs of slowdown, a combination of rental yields and capital growth offers the opportunity for investors to have an immediate income and the potential for long-term profit. One can also “cash in” one’s investment at any time by selling the property and investing one’s money in other ways.

Before embarking on any property purchases as an alternative to pensions, it is always advisable to examine if there are any regional variations in relation to growth and prices and research which property types have the best current growth potential.

At present, according to Zoopla, Wales and the North East have seen the biggest house price increases, whereas London is the weakest, and whilst flats are generally less sought after than houses, Scotland and the Midlands have seen recent price rises.

Although property investment is worth serious consideration as an alternative to traditional pensions for one’s retirement income, you need to consider that pensions in their current format are extremely tax efficient, your employer contributes if you’re in a work scheme and pensions don’t generally become liable for Inheritance Tax (IHT) as part of your estate. This last point is a major consideration for anyone who wishes to use property to fund their retirement – IHT currently starts at £325,000, so your estate could find itself with a tax bill of 40% against any assets above this level, which includes property.

Another consideration when investing in property is that buying, maintaining, and selling a property takes more time than contributing to a pension and there may be void times when the property is vacant. And don’t forget, there are various fees to be paid whenever you buy/sell a property and, unlike pensions which are governed and regulated by the Financial Conduct Authority to protect your investments, there are no such guarantees with property investment.

However, depending on your circumstances, even after considering the potential IHT consequences, having an investment of one of more properties could bring with it an element of flexibility which pensions can’t provide. It is wise to remember that you can’t access a pension until you’re 55 and there’s always the chance the government could change the rules on how you access your pensions at any time.

The decision on which option is best is a personal one on how to secure a comfortable retirement and we would always recommend that you should seek independent financial advice before making any decisions. The thing to bear in mind is that at the end of the day, neither property nor pensions offer a guaranteed level of income, and both come with risks. If you decide to invest in property for a retirement income, it is worthwhile considering owning property as part of a more diverse investment portfolio. An advantage to this option is that enables you to use your IHT liable assets first and save your non-IHT investments, like your pension, to last.

After all, when it’s your retirement income at stake, the wisest course is not to put all of your investment eggs in one basket.

Reference

BBC News online article “House prices at new high as buyers seek more space” https://www.bbc.co.uk/news/business-57976341 (accessed 27/07/2021)