Property and pensions are the two juggernauts of UK wealth. Most of our money is held in these two assets, with the split itself being fairly even.
Around £7.1 trillion is currently held in pensions. Property wise, defined as value minus mortgage debt, the figure is £6.9 trillion. The two often intermingle, especially when it comes to later-life planning. Retirees can supplement their pension funds with property income – and vice versa.
But, we’ve started to see some notable shifts across the financial landscape. In certain regions of England, such as London and the South East, property wealth is edging ahead of pensions, reflecting rising prices.
What’s more, many people are utilising their properties for financial support through our cost-of-living crisis. This same crisis has also put the relative stability of certain pension assets to the test recently.
All this begs the question, is property a good investment for retirement planning? While this is a complicated issue – which can only truly be answered by qualified financial planning experts – we’ll explore the topic and what’s being seen in the market in this blog.
Source: The Telegraph
What happened to pensions this year?
Private pensions, both old and new alike, have faced a difficult year in 2022. Pension funds are typically invested in a diverse range of assets in the capital markets. This usually involves stocks and government issued bonds (gilts).
There’s been a lot of volatility in the stock markets. An expected reality that comes with the territory. But this pressure appears to have rattled investors more so than normal recently.
In September, nearly £5bn of equity funds were sold. A record outflow. Even gilts, dubbed by many to be low risk, have faced unprecedented challenges.
When the then Chancellor Kwasi Kwarteng delivered his autumn budget, it led to a selloff of government bonds. This hit “gold-plated” defined benefit pensions particularly hard, forcing the Bank of England to step in and try to calm the markets.
All this volatility may be hard to stomach for those reaching their later years. If you’re getting ready for 20+ years of retirement, you’ll likely want your finances as stable as possible. Your days of taking on unnecessary risk may be behind you.
Seeing your pension values plummet because of short-term sentiment beyond your control could be worrying to say the least.
Source: This is Money, The Times
People are already turning to their properties for retirement support
Given what we’ve seen, the tangibility of property may prove tempting. The property market has faced its own pressures as of late, but the bricks and mortar will still be there when the dust settles. People cannot live in stocks or bonds.
We’ve already seen evidence of more people turning to their properties for retirement support. As inflation raged on, older homeowners turned to equity release to support their families. A record number of people drew cash from the value of their homes in the 3 months to October 2022.
What’s more, most high-net-worth individuals (84%) say they will use their property wealth to fund at least part of their retirement. The wealthiest plan to go one step further. Some 7% of those with assets of at least £3m revealed property wealth was their only pension source, according to Saltus.
Source: Official Monetary and Financial Institutions Forum, The Telegraph, Buy Association
So, is property a good investment for retirement?
This blog would need to be hundreds of pages long to accurately compare property and pension investment performances. There is simply too much variation at play. Pensions are invested through countless strategies, methods, and time frames. As are real estate plans, meaning there isn’t a clear answer to “is property a good investment for retirement?”.
Not to mention, there are numerous tax incentives, laws, and assets to consider. The only way to truly determine how best to invest for your retirement would be to work with qualified experts in the financial fields. This could compromise wealth planners, investment managers, tax advisors and more. What would work for you would be based on your specific circumstances.
But, generally, it could be sensible to diversify an investment portfolio. The more assets you spread your wealth across, the better your chances may be of beating inflation and supporting your lifestyle over the long-term.
To achieve diversification, investors could split their capital into pensions, savings, property, stocks and shares, and other assets. Asset allocation plays a huge role in any financial plan and in recent months, we’ve seen spooked savers limit their exposure to pensions.
Data from HMRC showed that between Friday 1 April and Thursday 30 June 2022, £3.6bn was taken out of private pensions by 508,000 people. An average amount of £7,000 was withdrawn – a 23% rise compared to the same quarter in 2021.
The Financial Conduct Authority also found an 18% increase in people accessing their pensions for the first time on the previous year, with just under 400,000 fully withdrawn. The question remains; what will people do with these withdrawn funds? Will they be funnelled into the property market?
Pension values and income potential faced a reality check in 2022
Given how the two markets have performed, investors may be rethinking their strategies. Is property a good investment for retirement will likely be a question on the mind of many people approaching their later years. Pension and property investments tend to be long-term endeavours, and both markets have faced difficulty in 2022.
However, many pension assets were hit by a reality check recently. The recent gilt crisis is believed to have wiped away £500bn worth of wealth. And even before the crisis emerged, some of the UK’s top pension funds saw their values halve in 2022.
But of course, for retirees, how much income can be generated from an asset will likely be just as important as its underlying value. On this, average annuity rates recently reached a 14-year high. In the 9 months to October, these rates rose by 52%.
A retiree aged 65 today, with a benchmark annuity of £100,000, could receive a yearly income of £6,973. At the beginning of 2022, this figure sat at £4,521. A healthy increase, but the most recent data from Zoopla shows the average monthly rent in the UK has reached £1,078. Buy-to-let landlords could get an income of around £13,000 a year from an investment.
Source: Evening Standard, The Telegraph, Moneyfacts, Evening Standard
The role of specialist finance
It needs to be remembered, there is no one right answer to the question of whether property investment is better than investing in pensions. You will still need to factor in the pros and cons of the various markets involved, the tax incentives at play, and what legislation could be on the horizon, as well as personal circumstances.
But some people may end up taking this route on their own initiative. In recent years, property demand reached unprecedented levels as investors tried to jump on rising prices and rental yields. Demand continues to exceed supply – even now.
Should we see a wave of new funding from pension wealth find its way into the property market, it’s unclear how mainstream lenders would cope. In recent months, high street banks struggled to adapt to difficulties in the economy.
In response to rising rates and economic instability, hundreds of mortgage deals were pulled from the shelves. Lending criteria tightened, and completion delays of more than 20 weeks emerged. For some, is property a good investment for retirement will be less of an important question than how can I get involved?
This is where the specialist finance industry can step up and help these (potential) new entrants to the market. We can adapt to a changing landscape, whereas mainstream lenders simply won’t have the capacity.
Our flexibility allows us to support borrowers of all shapes and sizes. Regardless of whether they’re seasoned pros, first-time-buyers, or pensioners who are having a rethink on their retirement plans. We’ll be ready.
Source: inews, Property Notify, The Times, Property Notify, CNBC, Financial Reporter, Mortgage Solutions,
MFS are a bridging loan and buy-to-let mortgage provider, not financial advisors. Therefore, Investors are encouraged to seek professional advice.