Cashing In Your Property or Your Pension?

You may have heard lots of people say that their property is their pension. What do they mean by this?

Well, they are trusting that the increased value of their property can be converted into a big enough income or lump sum to see them through their autumn years. Looking at what’s happened in recent years – property prices booming while pension values have suffered due to stock market performance – you can see why choosing property over pension saving has become so de rigueur.

Case closed then, just go for property? Err, no! Pensions have an ace up their sleeve – you get tax relief on contributions.

If you’re a basic rate taxpayer, for every 78% you pay into a pension the government through tax relief will top it up to £1 (the basic rate of tax is to be cut to 20p from April 2008, so basic rate taxpayers have to contribute 80p of every £1 from then on). Higher rate taxpayers get an even better deal – for every 60p they pay into a pension the government tops it up to £1. In effect the government – yes the government! – is giving you free money. And there’s more: If you’re a member of a workplace pension you may well find that your employer makes additional contributions into your pension – again, this is free money!

However, not all is rosy in the pension garden. You have to tie up your money for a long time and 75 % of the fund usually goes towards buying an annuity, an income for life. On the down side, property tax relief no longer applies to mortgage interest and over the long term a mortgage can cost you a lot of money in interest payments. For example, a £200,000 interest-only mortgage at a 5 per cent rate of interest will actually cost you £250,000 over 25 years and that all comes from after tax salary. Next time you hear someone boast about how much their property has increased in value, ask them if they’ve factored in mortgage interest payments and property tax relief – I bet you they haven’t even thought of this huge expense!

Your Property as Investment

Having said all that, I wouldn’t be foolish enough to do down property as investment. Some friends of mine have made an absolute killing in recent years and their retiring wealthy prospects have been given a stellar boost. The key is to have a balance of property, pensions, and other investments. Primarily, enjoy your property for what it is – a home – and if needs be use any increased value to boost your retirement pot, threat your property as investment.

There are three main ways to use your own home to increase your retirement wealth pot:

Sell up and move somewhere cheaper.
The option of selling your home and buying somewhere cheaper can make a lot of sense, particularly if you own a family home and your children have now left and struck out on their own. Downsizing, as it’s called, can help you free up cash and perhaps relocate somewhere that you really want to spend your autumn years

Sell up and buy-to-let.
For many this is ideal scenario. You sell your main home, buy somewhere cheaper, and with a portion of your profit buy a place to let out. The income you receive from your buy-to-let helps see you through retirement and you have the option of selling the buy- to-let at any time.

Equity release.
In effect you sign over a portion of your home to a bank or building society and in return receive either a lump sum or an income in return, this is the definition of equity release.

Home Information Packs (HIPs)

In June 2007 Home Information Packs (HIPs) – also called sellers’ packs – were introduced. This means that when you put your home on the market you have to make available to would-be purchasers an home information packs containing, among other things, a report on how energy efficient the property is, as well as local searches. You can also include a survey (known as a home condition report), but in the face of pressure from the anti - Home Information Packs lobby, the government has decided that this is not mandatory. It’s arguable whether Home Information Packs without the key document – the survey – will add much benefit for buyers, and they are likely to cost sellers between £600 and £1000.