Is your home your pension?
The research, commissioned by The Observer, revealed that a third of those people will live on income generated by investment properties, while a little more than half said that they would sell their own home to fund their retirement.
"For those who lack confidence in pensions, property often seems like a good alternative," says Patrick Connolly, IFA at Chase De Vere. "People are either able to sell their main property and downsize when they get to retirement or buy additional properties and rent them out."
With the majority of homeowners having a robust faith in the UK housing market and a belief that, over the long term, prices will remain on an upward trajectory this can seem like a sensible option.
Property prices rising
"The advantages of property are that people can see that they own a real tangible asset, rather than a number on a statement from a pension provider, and if renting out they can benefit from a consistent and regular income," adds Connolly.
According to research from HSBC, landlords in cities including Manchester, Blackpool, Southampton and Nottingham enjoyed rental yields north of 7% in 2015, while those in Luton,Oxford, Cambridge, Slough and Cardiff were getting upwards of 6%.
Capital values are rising too. At the end of 2015 Halifax reported that the average UK house was worth £204,552 - up an impressive 9% on the previous year.
However despite these compelling numbers, Connolly says relying on property to keep you warm in retirement could be a risky strategy. "It should be remembered that property prices can fall as well as rise and this will be a real danger when interest rates start to rise and mortgage payments become that bit more expensive."
For landlords there is also the risk that you'll have periods where your property is without tenants, meaning you'll have to find the money to pay the mortgage. You also need to be prepared for the costs and hassle associated with managing a rental property which could become increasingly inconvenient as you get older.
Don't forget the tax implications either. Income tax could be liable on your rental income (as it would on pension income) but you could also be stung with a big capital gains tax bill whenever you come to sell. Then there is inheritance tax to consider – as much as you may want to leave your property to family members it is one of the least tax efficient assets to pass on.
Downsizing may not be plain sailing either. When you consider all the costs associated with buying and selling (from estate agency fees to conveyancing costs) and the dreaded stamp duty, downsizers may not be able to unlock as much capital as they need – even in a rising market, which is no guarantee.
Connolly says: "If property prices have gone up it means you'll get more for yours when you sell, but it also means you'll have to pay more for whichever property you buy next. Also many people find that when they downsize they can't afford to buy a property they like in an area they like."
So while you imagine you'll be able to manage with a smaller property when your kids have fled the nest, the reality could be different if grandchildren come along. You may also find that even if you can get by with fewer bedrooms, getting used to smaller kitchens, cramped living spaces and no off-road parking could feel like a real downshift in your lifestyle at the very time you want to start enjoying it.
Diversify, diversify, diversify
From an investment risk point of view property can be problematic, adds Connolly. Unlike pensions (which allow you to invest across a broad range of asset classes, and thereby spread your risk), relying on property often means putting all your eggs in one basket.
"It is difficult to get any real diversification when investing in property as most people can only afford to buy a small number of houses, so you are unable to spread risk. Property is also quite an illiquid asset, meaning you may not be able to sell any properties at a time and price that you want," explains Connolly.
He adds: "For most people the best approach for long-term savings is a combination of pensions and Isas. Pensions provide initial tax relief which give your savings an immediate uplift but they are inflexible, whereas Isas can still be tax-efficient and you are able to access your money whenever you like."
That's not to say an investment in property cannot form a part of your retirement strategy, says Marino Valensise, chief investment officer at Barings Asset Management. "Young and old need to fully appreciate the level of risk involved in expecting to fund your retirement through the use of a volatile asset such as your home, or from other properties such as buy to let. Investing for your retirement is about long-term planning and as people are living longer, more emphasis needs to be put on how a lengthier retirement will be funded. It is imperative that people diversify their investments through a range of assets, which can, of course, include property."
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
The branch of law concerned with the preparation of documents for the buying and selling of property (or remortgaging), always handled by a qualified solicitor. The conveyancing process covers many of the legal aspects of the sale/purchase/remortgage such as land registry, local authority searches, freehold and leasehold status, title deeds and much more.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.