Property wealth & its role in retirement

Matthew Grief, Partner and tax specialist at Moore East Midlands
↑ Matthew Grief, Partner and tax specialist at Moore East Midlands

There are many things to consider when approaching retirement, your financial situation being one. Planning early for retirement can help to reduce stress later and ensure you can spend that time doing more of what you enjoy.

New research from insurance company Aviva has revealed there is growing retirement wealth held in property. Looking at the house-buying frenzy of 2021/22, the survey examines whether this has affected people’s attitude towards their property wealth.

On average house prices in the UK had increased by around 12% in April 2022, up from 9.7% in March that year. This has provided an attractive equity boost for those heading into retirement that own their property, either outright or with a mortgage.

While there is an indication that people are paying off their mortgages later than they were six years ago, the length of tenure in one property remains consistent at just under 20 years. For those that bought their property in 2002, when the average house price was £101,000, they will have seen a significant increase in their property assets since then. According to the research, those who own their property outright, have typically been there longer and will therefore have benefited even further from a build-up of equity in their home.

As property wealth continues to accumulate, it is likely that for many, the value will be considerably higher than anything they have in savings or investments. According to the research, the average equity people have in property is just under £195,000 compared to around £52,000 in savings and investments.

While savings and investments remain a valuable way to prepare for retirement, this research demonstrates the importance of considering all revenue sources, including property.

Those planning to use their property wealth towards retirement will need to consider how they plan on accessing those funds. Unfortunately, it is not as straightforward as a simple swap for cash. There are several ways to access those funds including downsizing your home or pursuing an equity release scheme. It should be noted that we recommend you consult an expert beforehand to ensure you are taking the most suitable route to meet your personal circumstances.

When planning for retirement, something else to consider is Inheritance Tax (IHT). While this won’t directly affect someone during their lifetime, it will affect their heirs.

IHT is a tax on the estate of someone who has died, this includes all property, possessions, and money. The standard rate for IHT is 40%. This is only charged on the part of your estate that is above the standard tax-free threshold of £325,000 (please note this could be higher when benefitting from a transferable nil rate band and/or residential nil rate band, or in some circumstances lower where you have made sizable gifts in the seven years prior to death).

There are various tax planning opportunities you can take advantage of to minimise your exposure to Inheritance tax, and the key advice is to consider these early enough for them to be effective. Everyone’s aspirations and the size of estate will differ and therefore we recommend that you consult an expert for tailored advice to meet your specific situation.

Despite economic challenges property has historically appreciated in value and is therefore likely to remain a valuable asset when planning for retirement. A comfortable retirement can take years of saving, so to make sure that you’re able to do everything you want to do when you finish working,
it’s never too soon to start planning.

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