Can you rely on a property for a pension?
Recent research reveals that our homes aren’t the goldmines we think they are
David Budworth

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.


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.


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.


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.


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.’