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Dangers of ‘property is my pension’

Ed Monk

Ed Monk - Fidelity Personal Investing

How many times have you heard it said that ‘my property is my pension’?

Dangers of ‘property is my pension’

It sometimes feels as though a whole generation has come to see houses as the route to financial security, and even great wealth. They have seen the fortunes that some people have made from bricks and mortar over the past two decades and concluded that it is their best bet for a comfortable retirement.

This could mean a buy-to-let that can be sold or milked for rent, but often boils down to a vague plan to use equity tied up in their home, which has risen dramatically in value over the years.

‘Downsizing’ is often the preferred route, and it has a neat logic to it. The family pile has served its primary purpose as a home to raise the kids, who have now grown and flown the nest.  By selling a four or five bedroom house, for example, and buying a two or three bedroom replacement, you’re surely bound to be left with a handy windfall, as well as a less expensive property to maintain.

Another variation might be to swap a prime location in the commuter belt, say, for something more remote, on the basis that the daily slog to work is now over.

This has no doubt worked for many over the years, but will it continue to work? Apart from anything else, it depends on house prices rising in general, and rising in a particular way. For many years, homes in London and the South East rose in value far more quickly than in other areas of the country. This helped those in the affluent South East to plot a path to cheaper areas and pocket a great cash boost along the way.

Just recently, however, this pattern has been inverted. Rightmove, the estate agency website, today became the latest market-watcher to record a split in the housing market with prices falling in London, but new all-time highs being achieved in The East Midlands, North West, Wales and Yorkshire and the Humber.

There still remains a big mark-up on property in the capital versus elsewhere of course but the gap is narrowing and that makes the downsize calculation far tighter.

Even those planning to own rental property in retirement are having to reassess their plans after a series of assaults from the tax man. Higher stamp duty on additional homes has wiped out years of rental profits and is a great disincentive to those hoping to join the UK’s army of small landlords. The chances of further tax grabs can only increase in the event of a Jeremy Corbyn government has set itself against second home owners.

For all these reasons, property is becoming less and less suitable as a potential source of financial security in retirement.

More on moving into retirement

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.