They say an Englishman’s home is his castle, and it is often his biggest store of wealth as well. While many of us have struggled on lower salaries or bonuses due to Covid-19 this year, the most recent house price study from Halifax, out this week, shows that the average property price in the UK has risen £15,000 between June and the end of November1 alone - an increase that tops the average salary during the same period.2
When your house earns more than you do it is easy to think that you don’t need other investments as well, or to decide that the most sensible thing to do with your money is to invest it in further property. But those who leave all their money in bricks and mortar may miss out on other ways of making the most of their wealth, and on breaks from the taxman as well.
The property is my pension fallacy
‘My home is my pension’ has been a long-running belief among British homeowners, with a survey five years ago finding that we are more likely than any of our European neighbours to be planning to sell our home to fund our retirement.3
But using property as your only store of wealth can be dangerous. For a start, you cannot access the money quickly if you need it - particularly if you are living in a home and need the money fast. And if you sell your home to fund your retirement you will still need somewhere to live, so your gains may be eroded by moving costs and stamp duty.
You cannot put property into a pension, unless it is commercial property or in a specific kind of property trust, which means that you will also miss out on valuable retirement tax breaks if you plan to use your home as your pension. While the government pays back your tax on up to £40,000 of pension contributions a year, it will not do the same for your mortgage payments.
Some positives about property
Many people have become buy-to-let landlords as one way to fund retirement using property investment. This can be lucrative, as long as you have the tenants in place, and can result in regular income.
Tax breaks on buy-to-let property have become less generous in recent years, with tax relief on buy-to-let mortgages replaced with a tax credit at basic rate and extra stamp duty payable on buying homes to rent out.4 This means it is important to work out how much tax you will pay on your rental income if relying on a buy-to-let to fund retirement.
While your pension is outside your estate for inheritance tax purposes and your own residence can attract some relief from this tax (provided it is passed down to a direct descendant), buy-to-let properties attract no reliefs.
What goes up can come down
It is also worth noting that, like other investments, property prices don’t always rise.
The current house prices rises reported by Halifax are due to a number of factors, with many people prompted to move after lockdown and a stamp duty holiday that arguably creates an artificial bubble. When this comes to an end, and with the uncertainties around Brexit and economic impact from coronavirus continuing, it is far from certain whether demand for property will continue to be strong, especially in hard-hit areas.
What’s the solution?
While there are lots of good things about being a homeowner and being a buy-to-let landlord can be a good source of income, it’s also really important to think about other plans to fund your retirement.
A financial adviser can help you with solutions on how to make the most of a pension, create a diversified portfolio of assets, and how to later ‘decumulate’ your wealth in the most tax-efficient way possible to fund the retirement you want, and perhaps leave a little left over for the next generation.
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https://www.halifax.co.uk/media-centre/house-price-index.html
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Assuming average (median) weekly earnings of £585 a week https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours
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https://www.moneyadviceservice.org.uk/en/articles/buy-to-let-property-investments