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Investing in property for retirement

Investing in property for retirement can provide long-term growth and a regular income to help you become more financial security during your golden years. Learn more in our property investment for retirement guide

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Have you considered investing in property to fund your retirement?

One study revealed that a large number of high-net-worth individuals intend to fund retirement using property wealth.

On average, 85% of high-net-worth individuals (HNWIs) plan to use residential assets to fund at least some of their retirement. Meanwhile, 21% said they plan on using equity in their home to fund up to half of their retirement.

The data also reveals that 45% of HNWIs plan to use buy-to-let property to fund up to 50% of their retirement income.

In this article, we will explore the benefits of investing in property for retirement and the options available for investors.

Is property a good investment for retirement?

For many, their pension pot is one of the primary sources of income in retirement.

However, property investments have several benefits that make them an attractive option when planning for retirement. Here are some key reasons why.

1. Appreciation and capital growth

Historically, the UK real estate market has shown a steady and consistent increase in value over time.

That is one of the reasons why brick-and-mortar investments have long been viewed as a good, reliable asset.

According to the Land Registry’s UK House Price Index, the average property price has increased by nearly 190% over the 50 years to January 2023.

Over the last 20 years alone, the average market price for UK properties has soared. The average price has gone from just under £125,000 at the start of 2003 to just shy of £289,000 at the turn of 2023 – an increase of 79%.

This demonstrates the capital growth potential of real estate and how it can be used to build your retirement nest egg.

2. Steady income stream

Rental properties can provide a source of passive income during retirement.

Investing in residential properties and putting them on the rental market allows you to generate the potential for a steady cash flow through rental payments.

Rental income can be used to supplement your retirement savings or cover the monthly mortgage payments.

3. Tangible asset

Unlike other types of investments, such as stocks and shares, real estate is a tangible asset. In other words, it is a physical asset you can see and touch.

This means with property, you have an asset that can generate a profit and boost your retirement funds. At the same time, it also provides utility. The tangible nature of real estate can also offer a sense of security and control over your investment.

Factors to consider

Whether you are putting money into the stock market or buying bonds, all forms of investing carry a certain level of risk. Real estate investing is no different.

Below are some key factors to consider about investment properties.

Management and costs

From maintenance costs and repairs to insurance and legal fees, a landlord’s expenses can be high. And these additional costs all eat into your total profits.

Managing a property not only costs money, it also costs time. As a landlord, you have various responsibilities.

You can utilise property management companies to take care of things on your behalf. Of course, their services are not free, so you will need to factor this into the cost.

Liquidity

Property is not a liquid asset. In other words, you can’t quickly convert it to cash like you can with other assets, such as stocks and bonds.

In some cases, property sales can take months. As a result, your money is tied up for a long time. This is something to bear in mind and plan for if you know when you will need the money.

Tax

There are no significant tax benefits or concerns for those who plan on equity release or downsizing as an option to generate money for retirement.

However, the same cannot be said for those who intend to go down the buy-to-let property route.

You pay Stamp Duty Land Tax (SDLT) in the UK on properties over a certain threshold.

A 3% SDLT surcharge applies to a second property or one you do not intend to live in – such as a buy-to-let property. This 3% surcharge is payable on top of the existing stamp duty tax rates.

When it comes to selling a property, you also need to consider Capital Gains tax.

According to the UK government, those in the higher rate tax band will pay Capital Gains tax at a rate of 28% for any gains from a residential property.

Property investment options to fund your retirement

When it comes to investing in property for retirement, there are various options to consider, each with its own risks and benefits.

Below are some of the most common approaches.

Equity release

Equity release allows those aged 55 and over to use financial products to release tax-free money (equity) tied up in their home.

You can take the money as a lump sum, in smaller amounts or a combination, and the funds raised can be used for anything.

Equity release also has the potential to reduce inheritance tax (IHT). That is because debts are not included in the value of your estate.

There are two equity release options:

  • Lifetime mortgages – a tax-free loan secured against your home.
  • Home reversion – lets you sell a portion or all of your home for cash. You can continue to live in the property, but you may have to pay rent to the equity release provider.

Buy-to-let

A buy-to-let property can provide a steady monthly income through rental payments. Real estate investors can also profit from the sale of the property.

Despite changes in recent years, buy-to-let investments are still a good option for investors. However, the location of the property is key to seeing good returns.

For example, properties in Manchester tend to have higher rental yields than those in parts of London. This is due to the higher initial investment and often more expensive mortgage repayments in the capital.

Your total return on investment is based on two main factors – rental yield and capital growth. Both of these can differ wildly depending on where the property is located.

Downsizing

As the name implies, downsizing involves selling your current home and buying a new one for a lower value. The money raised from the sale can then be used to fund your retirement.

Real estate investment trusts (REITs)

A real estate investment trust (REIT) allows you to invest in income-producing real estate.

Like mutual funds, REITs pool capital from multiple investors. But instead of investing in stocks and shares, the money is invested in properties and other real estate assets.

Another similarity between mutual funds and REITs is the ability to create a diversified portfolio easily. You can access a ready-made basket of assets, allowing you to diversify and reduce the overall risk of your portfolio.

Investing in property vs investing in your pension

So, is property a good investment for retirement, or should you invest in your pension?

Ideally, the answer would be both.

That is because property and equities (shares) generally move in opposite directions. When one performs well, the other may drop in value, meaning one should offset the other.

One thing that sets pensions apart from real estate investments is the tax advantages. Some of these include:

  • Tax relief on contributions
  • Tax-free growth
  • A tax-free lump sum from your pension pot (up to 25%)

Pension funds are also typically exempt from IHT. Pensions are generally not included as part of your taxable estate, unlike other investments or assets.

Investing in property for retirement

Property investments and retirement planning with Holborn Assets

For those looking to maintain their current lifestyle, most financial experts suggest that your retirement income should be roughly 80% of your pre-retirement income.

Investing in property for retirement can be an effective strategy to generate the income needed to cover the cost of retirement.

However, property is just one option. Retirement planning requires careful thought and should be tailored to you and your needs.

That is why seeking financial advice from a qualified expert is recommended. It can help ensure your plan aligns with your goals.

At Holborn Assets, our financial advisers work closely with clients to provide guidance and develop a retirement plan tailored to their needs and goals.

We also work with some of the leading property developers. This allows us to offer clients exclusive real estate investment opportunities.

Lay the groundwork today and build the future you want.

Book a free, no-obligation meeting today and learn how we can help you build a more financially secure future so you can make the most of your golden years.

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