Don’t rely on property to fund retirement as downsizing dream can disappoint

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, comments on the results of an Opinium survey (on behalf of Hargreaves Lansdown), showing that there should be no reliance on property to fund retirement as the downsizing dream can disappoint.

Key points from survey (involving 1,500 respondents):

• • One quarter of people said they planned to downsize their home in retirement.
  • Over a third (37%) said they wouldn’t, with the remainder saying they were unsure.
  • Reasons given not to downsize included being attached to the home (36%), too expensive (22%) and being unable to release enough income from a house sale to make it worthwhile (16%).
  • Buy-to-let is also popular as either an alternative or supplement to pensions.
  • House prices have increased substantially in recent years but buy-to-let has many costs -the recent Autumn Statement also slashed capital gains tax thresholds.
  • The Halifax House Price Index showed in November, prices were down 2.3% in a month. This is the third consecutive month of falls, and the largest since the financial crisis in 2008.

Helen Morrissey says:

“My property is my pension is a common response when people are asked how their pension saving is going. Property’s stellar returns in recent years have pushed up house values massively, leading many people to think it’s the ideal way to fund their retirement whether that be through buy-to-let or selling up and downsizing to a smaller home. 

“However, it’s more complicated than first thought and people should think carefully before putting all their eggs in one basket and deciding to fund their retirement through property rather than a pension.

“Property prices have soared in recent years but what goes up can come crashing down and the cost-of-living crisis and soaring mortgage rates are putting the housing market under real pressure right now.

“Data from Halifax shows rapid slowing in annual house price growth with prices trending downwards month on month-investors can no longer count on prices continuing to head northwards. 

“This means people looking to downsize to free up money in retirement may find it harder to sell than first thought and the money they get may not stretch far enough to buy them the property they were hoping for.

“Recent data from Zoopla shows sellers are increasingly having to slash their asking prices to get a sale. According to our data 16% of people said they wouldn’t make enough from downsizing to make it worthwhile, and we could see this figure rise in the coming year.

“The costs associated with moving is another key factor with more than a fifth (22%) of people saying a move would be too expensive while more than a third admitted they were too attached to their home to consider a move – the desire to downsize wanes as people get older so it’s important not to rely on having to do this to fund retirement.

“Those looking to fund retirement through buy-to-let also need to take account of other costs before taking the plunge. You will pay higher rates of stamp duty on a second property and you will need to factor ongoing costs such as maintenance fees and covering the rent during periods when it is unoccupied.

“If you are thinking of selling the property, then you will need to factor in capital gains tax as well. This currently sits at 18% if you are a basic rate taxpayer and 28% if you pay higher rate tax on gains above £12,300. The recent Autumn Budget slashed this threshold down to £6,000 from next April and £3,000 the following year so you could be landed with some nasty tax bills.

“Property will play an important role in many people’s retirements but there are pros and cons that need to be factored in, alongside key pension benefits such as employer contributions and tax relief.

“Relying on property at the expense of your pension could bring you a nasty shock come retirement if hidden costs and taxes come to bite you and leave you with less to live on than you thought.”

Kindly shared by Hargreaves Lansdown

Main article photo courtesy of Pixabay