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Relying solely on property wealth to fund retirement can be a risky business

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The housing market had a stellar year in 2021, with the average property price rising a whopping 9.8 per cent over just 12 months, according to Halifax data, bringing the average value of a British home to a record high of £276,091 in December.

It may come as no surprise then, that one in five homeowners considering how they’ll pay for their retirement plans to use their home as a cash machine, drawing out some of the capital reserves they hope to build in the interim to fund living costs in their golden years.

One in 10 hopes to downsize their property, nine per cent aim to sell their property and six per cent say they’ll access equity by taking a lifetime mortgage to help fund their later life.

The figures from Legal & General Home Finance, which surveyed 4,000 adults planning for retirement, also found that a third of all people who aren’t currently retired own a property but have less than £10,000 saved in their pension pot. A further 22 per cent of people hold no pensions savings at all.

Claire Singleton, Legal & General Home Finance chief executive, said: “The significant increase in house prices in recent years has likely shifted many people’s expectations of the role property wealth will eventually play in supporting their retirement.

“We anticipate that using your home to fund your retirement will become more commonplace in the future.”

Based on current house prices in England and Wales, L&G calculates that the average homeowner could access over £72,988 in equity release. Should house prices continue to rise, which they are predicted to though at a slower rate in 2022, that figure could be more.

Seven in 10 people over 65 are already dependent on the State pension as their main source of income but are also homeowners, L&G analysis suggests.

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“Our findings also show there are a large number of people currently in retirement who may be on a limited income and could benefit from the likely increases in the value of their home,” added Ms Singleton.

“It’s important we challenge the discomfort some people still have with using cash from their home to help them achieve better financial outcomes in retirement.”

Planning to unlock some of the value of our homes to boost retirement finances may be right for some homeowners, but for others and those who don’t want or manage to get on the housing ladder, assuming that rising house prices is the answer is a very dangerous game.

It’s never a great idea to put all your eggs in one basket and that applies to funding our later lives possibly even more than with anything else. Contributing savings to a workplace or self-invested private pension is also likely to produce capital growth over the long term. House prices may have risen on average by 9.8 per cent last year, but within that average will be wild swings in price inflation.

Location, local demand, labour market, property age and condition and access to amenities are the factors that really affect the value of your home. On one street homes that appear identical can vary in value considerably, meaning even if average prices rise 10 per cent, your home might have fallen in value due to any number of things – subsidence, flooding or high maintenance costs to name a few. Consider those who bought swanky new flats adorned with flashy cladding who can’t sell them for love nor money following the Grenfell tragedy.

By contrast, a pension invested in a mix of stocks and funds is less exposed to the risk represented by owning just one asset. And returns in 2021 were not to be sniffed at, with the FTSE 100 up 14.3 per cent, albeit following a terrible year in 2020. Over 30, 20, 10 or even five years though, it’s likely that the capital value will have risen. And with a pension, the government effectively gives you free money in the form of considerable tax relief.

There’s no right way to fund retirement, but banking on one thing at the expense of another is a high risk approach to a time in life when risk is probably something we’d all like to avoid.

iMoney is partnered with Age Partnership, a whole of market independent financial advice firm specialising in money matters for the older generation.

If you are considering equity release, you can find out more by downloading iMoney’s free guide, written by Elizabeth Anderson. To request your free copy, call 0808 239 1913 or download here.