HOMEOWNERS are being warned that they shouldn’t rely on property to provide a
pension, as new research has revealed that this would leave a typical family
with an income of just £100 a week to live on in retirement – a measly
£5,200 a year.
Big increases in house prices over the past decade have convinced millions of
people that they can count on their home to fund their retirement rather
than saving into a pension. Regular readers of our Fame and Fortune series
will know that the celebrity subjects often dismiss pensions in favour of
property.
Fewer than one in four UK employees has a private pension, down from 39% in
1992, according to the Policy Exchange think-tank. About 25m people of
working age are not saving into a pension scheme at all and many expect to
cash in on their family home by downsizing to a smaller property at
retirement.
However, Standard Life, the insurer, has sounded a wake-up call for those who
think their property will fund them through their twilight years. The group
said a couple who downsized from a detached family home to a bungalow would
unlock just over £118,000 worth of cash.
This is based on Halifax figures, which show that the average detached house
is worth just over £343,000 and the typical bungalow nearly £225,000. Assume
moving costs of about £2,250 and you are left with £116,000. That would
provide an income of just £100 a week once it has been converted into an
annuity, according to Standard Life.
Andrew Tully at Standard Life said: “Many people are pinning their hopes on a
continuing strong housing market to provide a retirement of their dreams.
But relying on your main residence to provide a retirement income is a
potential disaster.”
Standard Life acknowledges that wide regional variations in property prices
means that the average figures present a distorted picture. Some homeowners
in regions where price rises have been strongest could find that downsizing
provides a large chunk of their pension needs.
The average homeowner moving from a detached house in the southeast to a flat
in the southwest would release £311,000 of equity, sufficient to provide a
weekly income of £260 – about £13,500 a year.
These are average prices and some households will be sitting on far bigger
gains. If you moved from a £1m house to a £500,000 bungalow the cash you
release would generate £414 weekly income – £21,500 a year. For many people
this will still fall far short of the recommended retirement income of
two-thirds of final salary.
Standard Life is not alone in alerting investors to the dangers of counting on
property to fund you through retirement though.
Wayne Evans at Heron House Financial Management said: “Many people have got it
into their heads that property is a one-way bet that is only ever going to
make them money.
“If investors pile all their money into property they won’t have a diversified
mix of investments.”
Even landlords with buy-to-let properties are being urged to reassess their
retirement plans as the housing market slows. Experts warn that if they shun
pensions they are missing out on generous tax breaks and may be exposing
themselves to big risks.
We weigh up the pros and cons of saving for retirement.
PROPERTY
Nationwide said that house prices fell for the fourth month in a row in
February, dropping 0.5%, and many advisers think there could be worse to
come.
Capital Economics, a consul-tancy, is expecting falls of 5% this year and 8%
in 2009.
Nationwide and Halifax, however, are expecting prices to be fairly flat.
The sharp slowdown seems to have done little to dent investors’ faith in the
long-term potential for property. A survey by the National Association of
Pension Funds revealed that 33% of those not saving into a company pension
still think property is the best method of saving.
Only 25% put pensions on top, while tax-free individual savings accounts and
bank accounts were also unpopular.
Advisers are worried that many investors have a distorted view of the
potential returns from property. It’s true that this century housing has
been the winner. Since 2000 the annual increase in house prices has averaged
12%, while shares have gained just 3%, according to the ABN Amro Global
Investment Returns Yearbook.
Longer-term shares come out on top. If you had invested £100,000 in housing 25
years ago, by the end of 2007 it would have been worth £566,900, says
Halifax. Had you put it in the FTSE All-Share you’d be sitting on £857,587.
Shares look even more attractive if you include the return from dividends,
which would leave you with £2.2m.
However, when you factor in the impact that borrowing has on the overall
return from property the outlook for housing becomes brighter.
Taking out a mortgage means that you are able to take a bigger stake in the
property market. As long as house prices go up that boosts returns. A 10%
increase on a £10,000 investment is worth £1,000. The same gain on an asset
worth £100,000 results in a profit of £10,000.
You have to pay the mortgage interest, but hopefully the rent you receive will
cover the payments. Landlords pay tax on rental income and capital gains.
You can, however, get relief on mortgage interest, maintenance, council tax,
water and sewage rates.
Buying property, though, is still a substancial commitment. John Hewinson, at
Edward Jones, an adviser, said: "You have to have a substancial sum of money
to purchase a property so it is not an option open to all investors. Nor is
it a liquid investment as you have to have a purchaser to realise your
investment."
Even so, experts say wealthier investors should have property a part of a
diversified portfolio, particularly if they are to hold on for 10 to 15
years.
PENSIONS
The government offers tax relief on pension contributions to encourage people
to save. From next month the relief on offer will get less generous to
coincide with a cut in the basic rate of income tax from 22 to 20%. As a
result many investors will see less money going directly into their pension
schemes.
With a pension, tax relief is at your highest rate. If a basic-rate taxpayer
contributes £78 the government tops this up to £100. From April 6, they will
need to contribute £80 to achieve the same result.
A 30-year-old who contributes ments. Landlords pay tax on rental income and
capital gains. You can, however, get relief on mortgage interest,
maintenance, council tax, water and sewerage rates.
Buying property, though, is still a substantial commitment. John Hewinson at
Edward Jones, an adviser, said: “You have to have a substantial sum of money
to purchase a property so it is not an option available to all investors.
Nor is it a liquid investment as you have to find a purchaser to realise
your investment.”
Even so, experts say wealthier investors should have property as part of a
diversified portfolio, particularly if they are prepared to hold on for 10
to 15 years.
10% of a £30,000 salary into a pension could be £9,000 worse off by 65 as a
result, according to Scottish Life, the insurer.
Higher-rate taxpayers could also be affected. At present those with personal
pensions, including group personal pensions, can claim an extra 18% higher
rate relief through their tax returns. From April 6, they will get 20%
relief, ensuring that they will still get 40% back overall. However, if they
don’t reinvest that money into their pension they will end up with a smaller
fund at retirement.
People saving into company schemes that pay their contributions out of pretax
earnings will see no change. Even after the changes, the tax relief will
mean pensions are still one of the most efficient savings vehicles. If a
higher-rate taxpayer invested £500 a month into a pension over 25 years, the
tax relief would boost the fund from £406,060 to £614,000, assuming growth
of 7% a year.
From the age of 50, you can take a tax-free lump sum of up to 25% of your
fund. Providing your employer agrees, you don’t even have to give up work
when you take the lump sum.
The biggest drawback of pensions is inflexibility. With most, you cannot
access your money until you are at least 50. The government plans to
increase the minimum age to 55 by 2010.
Many savers also find annuity rules restrictive. You need not buy an annuity
anymore but many people feel it is their only option. You cannot switch
annuities. And you cannot bequeath your fund to your heirs – the annuity
firm pockets the lot.
WHICH IS BEST?
Even though house prices have soared over the past 25 years, pensions would
typically have provided a bigger retirement fund. For example, if a
higher-rate taxpayer had put £25,000 into a pension 25 year ago, 40% tax
relief would have boosted the contribution to £37,821.
The FTSE All-Share index has risen 2,214% in the past quarter century, with
dividends included.
Assuming the pension fund did the same, that fund would now be worth £847,570.
If they had put the £25,000 towards a deposit on a £100,000 buy-to-let
property their initial investment would have grown to £566,900.
You pay tax on property profits, which would leave you with £378,000. After
April 5, when the tax rules change, you would be left with £383,000.
WHY I WANT THE BEST OF BOTH WORLDS
AS landlord Eugin Song has a property portfolio of about £4m you would have
thought he wouldn’t bother with a pension. But Song, 36, pictured with wife
Karen, 33, and son Ethan, two, values the diversification and the tax
breaks.
Song, from Isleworth, west London, has been saving into a self-invested
personal pension for about 10 years. Most of his Sipp is invested directly
in shares.
He also owns and rents out 20 properties in the west London area and is
managing director of the online letting service Heathrowlettings.
Song said: ‘You are always told not to have all your eggs in one basket.
Having a pension alongside my properties ensures that I’m not risking my
retirement pot on just one asset. The tax relief on contributions also add
to a pension’s appeal.’
They're not for everybody, but the new-ish SIPPs are a way of doing your own investing and dumping a sum into a pot that won't do down when the markets do. Only challenge is that most people don't have the inclination, time or abiltiy to watch markets and make decisions.
John, London,
We sold at the height of the property boom last year and bought in a different area.
Result a lot of money now making money on top of pensions. Very happy.
Ann, Lincolnshire ,
Of course property is the best investment. You can borrow against it, you can invest it. you can live in it and if you have no money claim against it. Property has in the last thirty years increased in value in some places by 30%. As long as you are not a greedy you can manage quite well.
victor arram, westcliff,
A "pension", like an ISA, is only another INVESTMENT vehicle. All INVESTMENTS carry risk. There are no guarantees whether property or shares. I've never looked at my pension as a gurantee just because I put money in it. I've always looked at it as an investment. And investments go up and down and they must always be managed because they are inherently risky. So whether you are putting your money in shares or property it doesn't matter actually as long as you don't loose money! You only loose money on short term fluctuations and having to sell. Long term both asset classes have always risen if held long enough. The reason I tend to put more money in property is because it's less risky. Individual shares can go to zero value (Northern Rock) whereas a property very rarely does unless burnt to the ground without insurance (but even then there's the land value!) So that's why I invest in property more. However, I invest in shares to keep balanced and not risk everything in 1 asset class!
EuGin Song, London, UK
Only a little while ago, all the experts were saying that property prices were the best investment as everyone needs somewhere to live and there's a really drastic housing shortage. So where are all these apparently homeless people going to live now?!!
pedro tam, London, U.K.
Also, surely inflation wipes out the benefit of measley saving rates, even with tax breaks? You might as well spedn the money and have fun, worry about it when your older and hopefully earn more?!?
This is the governments fault, encouraging easy credit with lax lending, while not protecting pension schemes or pension companies, promoting BTL as the answer and thereby creating the massive house price bubble. Unfortunately when it pops, which it will, the fall out is suffered by the people that cant afford it.
John, London, UK
I am fed up with alarmist British headlines, in the tradition: "bells sounding", "warning!", and the sort.
I bought a London flat six months ago at the peak of prices, I have only my employer's pension -a pretty good one at that-, and you know what... I don't care.
I'm enjoying my flat a lot, don't mind if I don't have any savings left at the end of the month, if the property returns something in ten years time, then great, if not, oh well you need to live somewhere...
I don't trust pensions, as they can be raided. But I sure am tired of the headlines saying... "warning", "danger", "trouble ahead!"...
Please change the record. It is boring.
And people don't believe the hype, -whether over optimistic or over pessimistc-, any more.
Name Withheld, London,
Pensions have lost all sense of security because businesses and governments felt entitled to raid them. Sadly you can only do that so many times before people lose all faith in a system. The utility companies did it, Robert Maxwell did it, people were left high and dry and the government did nothing about it.
Pat, London,
Surely if you had spent 100K on a house 25 years ago it would be worth more than 560K today?
Rich, Cirencester, Glos
only Brits are so naif to think that their house can replace their pension!
riccardo, brussels,
Ask anyone under 30 what they think of pensions and you'll get, 'bad returns, no security, government can raid them'. Ask about property and you'll hear, 'buy-to-let, in it for the long term, foreign property hot spots, massive returns, property only goes up, buy now before too late'.
Property is glamourous and well-marketed. The PR in the media is constant.
We're a generation used to getting what we want immediately. Delayed gratification isn't our style. We want a house NOW, a buy-to-let NOW, a holiday home NOW - even if that means a smaller retirement fund later.
In short, we're a bunch of tv-addled morons without the financial nous or basic intelligence to comprehend other forms of investment.
Shares and pensions can't be trusted but housing always goes up - or so we think.
Eggs in one basket? You betcha.
B Cooke, London,