Read time: 2 mins Pensions

Should you fund your retirement with your home?

Traditionally, the most common way to fund a retirement is by paying into a pension during your working life, which then provides you with a regular income.

There are other ways you can help prepare for your future and many choose to invest in property alongside a traditional pension.

There can be a real sense of security that comes with owning bricks and mortar, and it’s true that, although property prices do fluctuate, over the long term, the value of a home does tend to increase.

But is it a good idea to rely solely on the value of a property to fund your retirement?

We’ll have a look at a few facts about property and pensions for funding your retirement, but it’s important to note that we are a restricted adviser – we only offer advice on our evestor products.

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History tells us that the value of property tends to increase over the long term, though by how much is unpredictable and can vary greatly across the country.

For example, the latest house price figures at the time of writing show that prices fell in Greater London during August, 2017, but increased in the north west and east of England.

According to Nationwide Building Society, the average UK house price in April to June of 2017 was £209,971, compared to £58,403 20 years earlier in 1997.

That’s an impressive average increase of around 6.5% a year, giving a total growth of £151,568.

But this isn’t money in your pocket - there is a great deal of expense that goes with buying and owning a property for 20 years that must be considered and there may be tax implications depending on your personal circumstances.

Firstly, you have to pay stamp duty on the purchase, which is calculated on a sliding scale that varies between 2% and 12%, depending on the price.

Most properties are paid for using a mortgage, which means paying arrangement fees, survey fees, solicitor’s fees and more, and you must pay interest payments for the life of the loan.

Interest rates are currently at a record low, and while they could still be lowered, they are likely to go up and continue to vary over time.

20 years ago, back in 1997, the base interest rate was 6.5% - 26 times higher than today – and the mortgage rate would have been higher still.

Property owners also have to consider insurance, and can be hit with unexpected expenses for repairs and maintenance.

So, whilst we won’t offer you advice on property purchases, we see that it can be a great investment opportunity – but putting all your eggs in one basket, whatever that basket may be leaves you more exposed to volatility in that market, which can increase your risk.

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The cash that you pay into a pension is invested, so the fortunes of most pensions are linked to a stock market.

Again, the value of your investment can go up or down but, over the last 20 years, the value of the UK stock market has grown by 68%, or an average 3.4% a year.

That’s a period that includes the stock market crash of 2008, when the FTSE all share index fell by more than 32% in a year.

So, growth may be slower than the UK property market, but, unlike property, there are actually tax breaks associated with investing in a pension, because the government wants everyone to save more.

You could get tax relief on a pension depending on how much you earn and how much of your income you invest into your pension.

And while pensions do attract charges, they are more predictable as they are capped by law, currently at 0.75%.

Of course, there are no guarantees that either the stock market or the housing market will continue to rise in value going forwards like they have in the past and your capital isn’t guaranteed in either investment.

There are plenty of ways to fund your retirement; whether it’s with pensions, property or another investment entirely, it’s completely up to you.

But before you choose to rely on only one investment (property, for example) consider if you might be better off diversifying your investment to help spread your risk.

And remember, it’s usually a good idea to receive professional advice before you decide.