With savings and investment rates at an all time low, people are more concerned than ever about funding care in later life and being able to pay for a comfortable lifestyle during retirement.
It would seem that an increasing uncertainty about where the best place is to save money for later life, has led many people to turn to property and the prospect of becoming a buy-to-let landlord.
How are people in the UK funding their retirement?
44% of over-55s used savings and investments to pay for retirement in 2019.
In 2020, this figure has fallen to 34%.
Income from a pension was the main source of funding for 40% of over-55s last year
Property, however, is the one source of retirement funding that has seen a positive surge. In 2019, 19% of over-55s said that property investment was their main source of income for later life, though this figure has now increased to 29%.
What are the pros and cons of investing in property for retirement?
If property prices increase you could make a profit on your initial investment
You’ll have a tangible asset
If you opt for a buy-to-let property you could have a steady stream of income throughout your retirement, depending on rental yields in the area you opt to buy in
If property prices were to decrease, you could lose money and end up with less for your retirement
Managing a buy-to-let property can be hard work, especially if repairs are needed or you have to face the uncomfortable situation of evicting tenants. Some BTL landlords pay management fees to a lettings agent to avoid this but of course, this reduces any profit made.
When purchasing the BTL property, you’ll also have to factor in costs such as stamp duty, surveyors fees and mortgage fees.
How do I know if a property is a good BTL investment?
Check the price history of the property and whether there has been an increase or decrease in value. Property portals such as Zoopla and Rightmove display price history on their listings but for a more accurate figure ask your estate agent.
Consider the location of the property and whether it’s close to local amenities, transport links or universities (if you’re letting out a student house!)
Think about who you’ll market the property to and whether the location and home would be suitable for their lifestyle.
If you’re thinking of renting to a young family, does the property have an enclosed garden? If you’re renting out to a working professional, is there space for a desk and is it close to the train station. Taking the needs of your tenants into consideration could make it easier to let your property out and potentially charge higher rent.
Compare the average rental rates in the area you’re considering buying to get a better understanding of how much you could charge and make in profit.
Can I withdraw my pension to invest in a buy-to-let property?
A 2019 poll by YouGov found that three in 10 people aged between 45 and 54 were considering withdrawing their retirement funds to purchase property to let out.
This could potentially be a risky move for many soon to be retirees as if they were to release the full amount in one lump sum, a hefty income tax may be payable, reducing the amount. In fact, insurer Royal London claims that, on a £400,000 pension, savers would need to pay £120,000 in income tax.
Unfortunately, that’s not the only tax to consider when weighing up this option as 3% stamp duty charge could also be payable depending on the value of the property and whether the buyer is a first-time purchaser.
Furthermore, transferring or withdrawing a pension early could also result in the pension provider charging early exit fees or transfer fees which could again reduce the total amount of money in the pot to purchase property with.
If you’re unsure about the fees associated with your pension, check the terms and conditions of your agreement or ask our experts who can find out on your behalf.
Can I use equity release to fund my retirement?
For some people, the thought of managing property while trying to enjoy retirement simply doesn’t appeal, afterall, retirement is for relaxing right?
An alternative option, depending on how much equity you have built up in your own property, could be equity release.
Equity release allows eligible homeowners to free up cash from the value of their property as opposed to leaving the money tied up in the property.
Depending on the type of equity release you opt for, you can either release funds as a lump sum or as regular smaller payments direct to your bank.
This route is offered to those over 55, so it could potentially allow you to retire early rather than wait until your pension date.
Will I have to move out of my home?
A benefit of equity release is that no, you won’t have to move out of your property. The loan is repaid by selling the property, either when you pass away or if needed, move into permanent care.
Could I downsize to free up cash for my retirement?
Downsizing to a cheaper property could allow you to free up some cash to fund your retirement. However, the big consideration is just how much you’ll have left over after the transaction and whether realistically it would be enough to live comfortably.
For example, if you were to sell your home worth £400,000 and move to a smaller property worth £250,000, you would have a remaining budget of £150,000 (excluding mortgage fees, stamp duty etc.) If you were 65 and planned to live until say, 90, that would give you £6,000 a year to live on, again excluding any additional pensions or streams of income.
That being said, every situation will be different given that there are a multitude of factors that could affect the value of your home and your budget throughout retirement.
If you’re unsure about downsizing to fund your retirement, speak to one of our advisors and they can discuss the most financially viable option for you based on your circumstances.